Amazon’s Aggressive Spending Limits Taxation

Stock (Symbol)

Amazon.com (AMZN)

Stock Price

$958

Sector
Retail & Travel
Data is as of
August 23, 2017
Expected to Report
Oct 25
Company Description
amazon-videoAmazon.com, Inc. (Amazon.com) is an e-commerce company. The Company’s products are offered through consumer-facing Websites, which include merchandise and content that it purchases for resale from vendors and those offered by third-party sellers. It also manufactures and sells electronic devices, including Kindle e-readers, Fire tablets, Fire TVs, Echo and Fire phones. Amazon.com operates in two segments: North America and International. The North America segment focuses on retail sales earned through North America-focused Websites. It serves developers and enterprises through Amazon Web Services (AWS). It serves authors and independent publishers with Kindle Direct Publishing. Source: Thomson Financial
Sharek’s Take
David SharekAmazon.com (AMZN) has extra money to play with because the company invests to not only grow but also limit taxation. Sales were $38 billion last qtr, with profits of just $197 million (0.5%). In the year ago period AMZN did $30 billion in sales and delivered profits of $857 million (2.9%). Clearly this strategy gives the company extra money to invest with. Free cash flow rose from $7.7 billion to $9.7 billion. Amazon has acquired Whole Foods, and is using its mighty clout to get lower prices on items and passing them along to customers. But there’s more than groceries, Amazon is entering many industries. Amazon Web Services is among the company’s most profitable divisions with 22% margins and had 42% sales growth last qtr. Amazon is also expanding overseas with Mexico, the Middle East, Singapore and India all hot spots for future growth. For the last four qtrs AMZN has had profit estimates slashed. But the cut went especially deep this qtr as 2017 estimates dropped from $6.67 to $3.82 (this was $9 4qtrs ago). In past research reports I was excited about Amazon perhaps making $15 or $20 a share in annual profits iin the near future, and that profit growth would garner the stock additional investor interest. But now this is more of a “buy-and-hope” story that’s difficult to get a valuation on. Clearly this is a valuable company, but we can’t value it using profits and a P/E. With the stock triple what it was three years ago, I feel AMZN will take a break and digest its gains, but I think investors should own this stock for the long-run.
One Year Chart
Last qtr I said new investors should buy on a dip as the stock went from $700 to $1000 in a year. AMZN was actually at an All-Time high just before it reported in earnings in Julyand now is down a bit from those levels as the company missed the $1.40 estimate by $1. Also, NextQtr’s est dropped from $1.11 to $0.06. Overall profit growth is expected to be -88%, 14%, 22% and 310% the next 4 qtrs (that last % is high because of the comparisons to last qtr). P/E jumps from 147 to 251 on the cut in estimates. The Est LTG is 28% and since overall sales grew 25% last qtr I feel that could be accurate. But we don’t know, because that’s an estimate of the profit growth rate.
Fair Value
With the stock at $958, it’s withing 7% of my 2018 Fair Value. But having a fair value on this stock is just a guess anyway.
Bottom Line
Amazon has had a nice run, tripling in price during the last three years. Some of that can be attributed to the impressive profitability of Amazon Web Services. But on the other hand without a real valuation, we can’t sit here and say the stock’s too high on a fundamental basis. For now I think this stock will base and digest its prior gains, and I would certainly take profits in the stock. But this is perhaps the best company in the world and I wouldn’t sell out totally as this company will evolve into something greater in the coming decade. AMZN ranks 14th in my Growth Portfolio and Aggressive Growth Portfolio Power Rankings.
Power Rankings
Growth Stock Portfolio

14 of 33

Aggressive Growth Portfolio

14 of 14

Conservative Stock Portfolio

N/A