Amazon is Cheaper Than You Think

Although Tesla (TSLA) and Apple (APPL) pulled in more search volume by financial pros in the last 30 days, Amazon’s views grew markedly month over month.

Maybe that’s because the company which often grows its revenues at +10% per year, trades at 20x cash, cheaper than most consumer staple companies.

Yes, everyone owns Amazon. But there’s a lot of reasons why you should at these prices.

Amazon’s Business

Once an online book merchant, Amazon’s grown into a retail powerhouse with tentacles in everything from grocery to healthcare.

Yet, it wasn’t until the company introduced its Amazon Web Services (AWS) that things really took off.

Today, the company runs three divisions: North America, International, and AWS.

Source: Amazon Q3 Earnings 2023

Although visionary found Jeff Bezos is no longer running the show, Amazon continued to thrive as online shopping, accelerated by the pandemic, continues to grow both domestically and internationally.

Interestingly, the company’s revenue growth is fairly uniform, with each segment around 10%-12% annually.

However, they aren’t even close profit-wise.

AWS operates at a 30% operating margin, while the North American market is just 4.9%, and the international segment actually loses money (driven in part by the war in Ukraine but also higher regulatory burdens).

Financials

Source: Stock Analysis

Amazon is a marvel in its size and scope.

The company generated $71.7 billion in cash from operations last year. That’s more than the GDP of several small countries.

Their total debt of $166 billion might seem high to us mere mortals. Yet they carry $64.1 billion in cash and only pay $3.1 billion in interest on that debt, an effective rate of 1.9%.

The depreciation and amortization costs hamper the company’s operating income, which is why they had negative net income in 2022 and 2014.

However, Amazon only made a profit on paper in the last decade. Before then, it was notorious for plowing money back into growth.

Nonetheless, Amazon’s ability to keep finding new growth areas is impressive.

Valuation

Source: Seeking Alpha

P/E ratios don’t really tell the story for Amazon, in part because the company has over $40 billion in depreciation and amortization.

That’s why we look at price-to-cash flow, which makes Amazon the cheapest on this list.

It also boasts the lowest price-to-sales ratio, which is impressive given its set of peers.

Growth

Source: Seeking Alpha

Despite its enormous size, Amazon still manages +10% annual revenue growth, which isn’t limited to one area.

True, NVIDIA (NVDA) and Tesla (TSLA) deliver and are expecting much higher revenue growth numbers. Yet, neither has truly captured its true market potential.

Even Microsoft’s (MSFT) forward revenue growth isn’t forecast much higher than Amazon’s.

The one knock we do give Amazon is its minimal free cash flow growth. But, as we noted earlier, that’s expected to improve.

Profitability

Source: Seeking Alpha

Amazon’s gross margins are stunning, making it more like a technology company than a grocery store.

While its net income margin isn’t great, the levered free-cash-flow margin is adequate and improving. 

We would like to see them achieve higher returns on equity, assets, and total capital. However, their spending on growth would need to subside for that to happen. And we’re not sure that’s a tradeoff we’d want right now.

Our Opinion 10/10

Amazon may be big, but it’s burgeoning.

There aren’t many companies capable of generating so much cash while growing revenues in the double digits.

We expect the international business to turn around in the next few years either by the war in Ukraine ending or Amazon simply adjusting operations to the new reality.

At 20x trailing 12-month cash flows and 16x forward cash flows, we believe Amazon is a steal at these prices.