By Ee Hsin Kok. Edited by Arjun Chandrasekar.
What was once a small online book retailer has since evolved into the 5th largest company in the world with a market cap of $1.68 Trillion. The company is most well known for its e-commerce and cloud computing operations but also dabbles in industries from supermarkets to digital streaming. It is listed in the US under the ticker symbol ‘AMZN’, and sits at $3316 as of 8/27/21. In this article, we analyze Amazon to see if it might be a good investment decision for you.
How Amazon Makes Money
There are two main industries that Amazon generates income from. The first is e-commerce and the second is cloud computing. In the e-commerce industry, Amazon is the market leader in North America, with a gross merchandise value of over $200 billion. Its operations from its online stores and third-party selling services account for around 70% of Amazon’s total revenue. In the cloud computing space, Amazon dominates with AWS (Amazon Web Services). AWS has a 33% market share of the cloud services industry, 15% higher than second-place Microsoft Azure. AWS can also be considered as Amazon’s true cash cow, because despite only contributing to 12% of the company’s revenue, AWS is responsible for over 45% of the company’s net income!
In addition to that, Amazon’s subscription service – Amazon Prime – has over 200 million subscribers and continues to grow. Amazon Prime is a subscription service that gives people free 2-day shipping on all their orders off Amazon, and the company has continually added new benefits to the service, such as access to streaming services, music, and ebooks. In fact, Amazon is able to offer so many benefits because it has built a strong ecosystem of businesses spanning multiple industries such as Twitch, Whole Foods, Amazon Prime Video, Amazon Prime Music, Audible, Amazon Pay, Amazon Logistics, and Alexa.
Growth Drivers and Valuation
Despite being the 5th largest company in the world by market cap, there is still plenty of space for Amazon to grow. Accelerated by the Covid-19 Pandemic, Amazon is set to capitalize on the secular shift toward e-commerce. Additionally, the cloud computing space is expected to grow at a CAGR of 19% over the next few years, and as the leader in the industry, Amazon will surely capitalize on that growth. Finally, Amazon has invested very heavily into India, and with the country’s economic boom and a massive population of over 1.36 Billion people, Amazon is set to make bank off the country’s growth.
In the past 5 years, Amazon has had an annual growth rate of 101.8% (which is insane!). Going forward for the next 3-5 years, Finviz, Zacks, and Simply Wall Street predict Amazon’s EPS will grow at 35.77%, 27.55, and 28.32% respectively. Using a 20 Year Discounted Cash Flow valuation, we can place Amazon’s intrinsic value at around $3700. Meanwhile, MorningStar and Simply Wall Street values the company at $4200 and $4800 respectively. So at its current price of $3316, we can confidently say that Amazon is undervalued.
Historical Performance and Financial Strength
Amazon’s historical performance is nothing but outstanding. Over the past 5 years, the company has grown its earnings at a rate of 101.8%, and its share price has increased 331% compared to the S&P 500’s 105.38%. Additionally, it has a strong ROE (Return on Equity) of 29.9% and a pretty conservative debt structure with a current ratio of 1.00, a debt-to-EBITDA ratio of 1.56 and it has reduced its debt to equity ratio consistently over the past 5 years.
Is Amazon a Good Investment Right Now?
As of today, with a market price considerably below its intrinsic value, it seems that Amazon is a pretty good buy. After all, the company is insanely safe on a fundamental level: the market leader in two huge secular growth industries has an extremely wide economic moat across a myriad of industries, great historical performance, strong growth drivers for the future, and a conservative debt structure. I mean, what’s there NOT to love about Amazon?