Why Amazon (AMZN) is Cheaper Than You Think

In the early 2000s, Amazon’s (AMZN) website crashed frequently, especially during peak traffic times.

Thus, in 2006, Amazon’s Web Services was born.

A combination of size and ingenuity propelled Jeff Bezos’s brainchild to its current $1.7 trillion market cap.

According to our TrackStar data, after the latest earnings release, financial pros began to discuss plans for the company’s future.

Lower consumer spending threatens its core business while AI competition from Microsoft puts the AWS business directly at risk.

Yet, the latest pullback puts Amazon at a 20%-25% discount to its recent highs.

Is this the time to jump in with both feet?

Amazon’s Business

From humble beginnings as an online bookstore, Amazon has morphed into a colossal force reshaping how we shop, stream, and power the internet.

The Amazon empire spans a dizzying array of services. It ships millions of packages daily, streams blockbuster shows, and provides the invisible backbone powering much of the internet. 

The company’s reach extends from AI-powered smart homes to cashier-less grocery stores.

Amazon segments its business into the following areas:

• North America (61% of total revenues) – Includes retail sales, third-party seller services, and subscription services in the U.S., Canada, and Mexico.
• International (21% of total revenues) – Encompasses services similar to those in North America but in other countries.
• AWS (18% of total revenues) – Provides cloud computing services to businesses, governments, and individuals.

Amazon’s Q2 2024 earnings flexed its muscle: sales surged 10% to a staggering $148 billion. Even more impressive, operating income nearly doubled to $14.7 billion, with AWS leading the charge.

Like the rest of large tech, Amazon is betting big on AI, rolling out Rufus (a smart shopping assistant) and beefing up its cloud AI toolkit. 

Amazon’s AI ambitions run directly into Microsoft, its cloud rival, each offering different choices.

Azure’s edge lies in its seamless integration with Microsoft’s enterprise suite. 

It offers AI-powered enhancements to familiar tools like Outlook and Excel, making advanced capabilities accessible within existing workflows. 

This approach, coupled with access to OpenAI’s cutting-edge models, positions Azure as a compelling choice for businesses deeply invested in the Microsoft ecosystem.

AWS counters with unparalleled flexibility and raw computational muscle.

Its Bedrock platform allows companies to craft bespoke AI solutions, leveraging a diverse array of models.

AWS also benefits from Amazon’s extensive experience in applying AI to real-world challenges, from logistics optimization to personalized recommendations. 

This practical expertise translates into robust, scalable solutions for its clients.

The choice between Azure and AWS often hinges on a company’s starting point and long-term goals. 

Azure offers a smoother transition for Microsoft-centric organizations, while AWS appeals to those seeking maximum customization and scalability. 

Financials

Source: Stock Analysis

Amazon’s growth continues to amaze us. Despite its massive size, revenues have climbed by double-digits every year except 2022, when they were just below 10%.

The expansion of AWS improved gross margin by nearly 10% since 2019. This hasn’t always translated to higher profit or free cash flow margins as both SG&A and R&D expenses climbed, driven by the company’s infrastructure and technology buildouts.

However, cost-cutting measures have brought these back in line.

Currently, the company generates an astonishing $108 billion in cash from operations with CAPEX of $60 billion.

Management has chosen to use the excess cash to reduce its debt load, which sits at a hefty $158 billion, even though the company holds $89 billion in cash on its balance sheet.

One point worth noting is that Amazon pays no dividends or repurchases shares, an ongoing criticism that could become more vocal should growth slow.

Valuation

Source: Seeking Alpha

Compared to other mega-cap companies, Amazon is fairly cheap, trading at just 34x forward earnings and 16x cash. 

That’s certainly a premium to Chinese internet retailers like Alibaba (BABA) or Temu’s parent Pinduoduo (PDD).

However, we’d argue Amazon’s business is far more stable and risky.

Growth

Source: Seeking Alpha

Now, Amazon may not put up the growth numbers like MercadoLibre (MELI). However, its consistent double-digit revenue gains are a testament to the company’s loyal customer base both for consumer goods and AWS.

Furthermore, Amazon has shown incredible free cash flow growth at a time when many companies are feeling the pinch of inflation.

Profitability

Source: Seeking Alpha

Because Amazon relies on volume, its net income and free cash flow margins aren’t spectacularly high.

However, if you look at the cash from operations, you’ll see what happens when you push billions of dollars through their business model.

The one objectionable point is the lower returns on assets and total capital. Both are below 10%, something we’d like to see the company improve on in 2024.

Our Opinion 8/10

AWS continues to grow while we see AI sharpening the company’s margins for its internet retail business.

We expect lower consumer spending could hit Amazon’s shares harder in the coming months.

However, that becomes an opportunity to step into a position with a company that dominates every vertical it enters.

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