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Financial Pros Top Stock Searches Last Month
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Buy AMZN Near the Highs?
Without question Amazon (AMZN) is a popular stock.
It’s always in the top 10 searches by financial pros and retail, making it into the top 5 more often than not.
Last week’s quarterly results helped boost interest in the stock, especially in light of the company’s results.
While overall performance declined across the board, traders rewarded management for posting better than expected results led by a 33% gain in Amazon Web Services sales.
Yet, as the company faces a slowdown in consumer spending, asking whether shares deserve the current price is a prudent question.
We dug into the financials to determine how exposed the company is to a potential recession and how that might affect growth.
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It’s got nothing to do with inflation, either.
A powerful force is driving a wedge between the haves and the have-nots.
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What is coming next will be different than anything before.
Started by Jeff Bezos more than two decades ago, Amazon morphed from an online book marketplace to a full-blown consumer products and business services powerhouse.
Although it’s tough to imagine, the company didn’t turn a consistent profit until 2015, largely driven by the growth in AWS.
The business is divided into products and services, each accounting for roughly half of total sales. Management also breaks down operations into North America, International, and AWS, each accounting for 60%, 24%, and 16% of total sales respectively.
In the latest results, both North America and International sales divisions posted negative operating income, while AWS remained profitable.
Below is a further breakdown by the various business units.
Online stores generate the highest amount of sales followed by third-party seller services and then AWS.
Sales exploded during the pandemic as consumers stuck in their homes began to order heavy amounts of goods online.
That led Amazon to a huge buying spree of warehouse space and logistics services.
However, with a recession looming on the horizon, management put the kibosh on many of those projects not already underway.
In addition, Amazon faces a penetration problem with fewer growth prospects in the U.S. That led the company to a multi-tier Prime membership system.
Lastly, the company’s foray into areas such as content, AI, and other non-adjacent markets all bodes well for the future. However, it currently sucks cash from the bottom line.
Amazon managed to consistently drive revenue growth at a double digit rate, with 2020 being one of its best years.
Yet, earnings rarely match the stock’s popularity, with P/E ratios often over 100x. That sits at odds with the gross margin expansion from 33.04% to more than 42%. Even operating margin expanded nicely over the years.
Higher SG&A drove the majority of the cost increases with R&D right behind.
Neither is expected to see any meaningful reduction in the coming quarters.
Despite going negative in the most recent quarter, operating cash flow continues to climb steadily.
Yet, the huge capital expenditures have kept free cash flow negative for the past year.
Strikingly, the balance sheet holds $64.8 billion in long-term debt and another $66.5 billion in capital leases. That’s twice what the company holds in cash and short term investments.
This aligns with the current ratio of 0.95x, which means short-term liabilities outweigh short-term debts.
As we noted above, Amazon’s earnings don’t equate to the juggernaut’s revenue growth.
Hence, the P/E for the rolling 12 months sits at almost 120x but is paltry compared to the forward-looking 1,979x.
By nearly every measure, Amazon is expensive.
However, that’s largely due to the stellar growth.
Amazon’s revenue growth for the past year hasn’t been as impressive as its historical performance.
Yet, forward growth is expected to beat the sector median, even though it’s below the 5-year average for the company.
As noted earlier, Amazon’s gross margins are impressive.
Yet, the company’s continual expansion efforts cash flow and lower net income. That’s not expected to change anytime in the near future.
Our Opinion – 5/10
No one can ever really make the case that Amazon is a ‘value’ play.
Yet, markets seem bent on punishing growth stocks at the moment. Until that changes, we’re simply not interested in the stock and see other tech companies as better investments.
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