Amazon is a leading global technology and ecommerce company. It generates nearly $400 billion in annualized net sales and nearly $600 billion in annualized online gross merchandise volume. While the retail business brings in roughly four-fifths of the company’s revenue, its cloud computing business – Amazon Web Services – brings in 10-15% of the total revenue, while the remainder comes in from miscellaneous businesses that include advertising services. While the company primarily operates domestically, it also derives 25%-30% of its revenue from international markets.
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I am bullish on Amazon.com Inc. (AMZN), as strong growth momentum across its business segments, powerful competitive positioning, strong backing from analysts, and attractive valuation make it look like it could be an attractive play.
In this article, I will lay out why I am bullish on AMZN stock at current prices.
Disappointing Q1 Results, Upbeat Outlook
Fiscal Q1 results for AMZN surprised the market to the downside. Operating cash flow plunged by 41% to $39.3 billion over the past twelve months. This was while free cash flow plummeted to negative $18.6 billion over the trailing twelve months from being positive $26.4 billion in the prior trailing twelve month period. Operating income also declined precipitously, falling from $8.9 billion in Q1 2021, to $3.7 billion in Q1 2022.
While operating cash flow, operating income, and free cash flow both trended negatively during Q1, net sales did continue to grow, increasing by 7% year-over-year to $116.4 billion, and actually increased by 9% on a currency-neutral basis.
Overall, the company generated a net loss in Q1 of $7.56 per share compared to running a profit per share of $15.79 in Q1 2021. However, when excluding the loss of $7.6 billion from AMZN’s investment in Rivian Automotive (RIVN), AMZN actually generated a profit during Q1.
Amazon Web Services saw very robust 37% year-over-year growth in Q1, serving as the highlight of the quarter. Much of the dramatic decline in cash flow during the quarter stemmed from AMZN overbuilding its fulfillment capacity over the past 24 months, leading to significant inefficiency.
Dominant Competitive Positioning
While the company is facing operational efficiency challenges at present, it remains very well positioned from a competitive strength standpoint. It enjoys massive economies of scale across its business model that give it cost advantages and customer service advantages over its competitors. It also possesses a treasure trove of consumer data, has massive network advantages on its online marketplace, as well as through the relationships it has built with leading companies across the economic spectrum via its AWS business. The company also owns substantial intellectual property, giving it intangible assets.
Moderately Attractive Stock Price
While it faces near term headwinds, its long-term growth profile remains intact and the stock price looks fairly attractive.
For example, the EV/EBITDA multiple is only 15.32x, the price to normalized earnings ratio is 65.97x, and the price to free cash flow ratio is 40.17x. The company’s respective five year average ratios for each of those metrics is 22.92x, 96.46x, and 36.30x, so the upside potential is enormous if AMZN can regain its former appeal to the market. That said, the free cash flow multiple is currently slightly elevated, reflecting the operational challenges confronting the company at the moment.
The firm also continues to have a strong growth outlook. Through 2026, the consensus revenue CAGR is 14.2% and the consensus normalized earnings per share CAGR is 19.0%.
Wall Street’s Take
On top of that, Wall Street analysts give AMZN a Strong Buy analyst consensus based on 35 Buy ratings, one Hold Rating and one Sell rating in the past three months. Furthermore, the average analyst AMZN price target of $3,624.86 puts the upside potential at 57.4%.
Summary & Conclusions
AMZN is a leading ecommerce powerhouse that also has a large and rapidly growing cloud computing business, as well as some additional ancillary businesses. AMZN possess massive competitive advantages and is able to attract top talent.
As a result, even though it is currently facing operational efficiency challenges due to overbuilding its fulfillment capacity, there is every reason to be confident that the company will overcome this as a short-term speed bump and continue to grow for many years to come.
Given the discounted share price, it looks like it might be a good time to add shares.
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