After more than a year of moving sideways, I think Amazon.com (AMZN) arguably presents the best risk/reward among the big-5 U.S. tech giants.
To be sure, there are some things that could keep weighing on Amazon's stock in the short-term. Chief among them: After Amazon posted softer-than-expected top-line numbers in late July and disclosed that its revenue growth has been in the mid-teens since May 15, markets have been nervous about the impact of re-openings in the U.S. and elsewhere.
Worries about supply chain bottlenecks, labor shortages and both wage and commodity inflation have also been on investors' minds. And with the Nasdaq starting to wobble in recent weeks amid rising Treasury yields, it's possible that Amazon gets caught up in a broader tech downdraft.
Nonetheless, for investors with medium or long-term horizons, I think there's a lot to like about Jeff Bezos' company at current levels. Here are what I consider to be the biggest selling points:
1. Amazon's Valuation Looks Fairly Inexpensive
Valuing a conglomerate that has long been comfortable depressing its quarterly profits in order to strengthen its long-term position remains tricky. But if one independently values Amazon's e-commerce operations and Amazon Web Services (AWS) based on their sales, then the company as a whole looks far from expensive.
AWS' 2022 revenue consensus stands at $77 billion. Assigning a 10x sales multiple to the public cloud giant -- below that of many high-growth, marquee, enterprise cloud names -- would lead it to be worth $770 billion and the rest of Amazon's operations to be worth about $880 billion.
At $880 billion, the rest of Amazon's operations would be valued at just 1.8 times a 2022 revenue consensus of $487 billion and just 1.1 times a 2022 gross merchandise volume (GMV) consensus of $807 billion. These multiples are below those of most publicly-traded e-commerce peers -- including ones that have much lower margins than Amazon and/or weaker competitive positions.
Also: Though I'm not a fan of valuing Amazon based on P/E given its spending philosophy, the company does now trade for 49 times its 2022 GAAP EPS consensus estimate and 35 times its 2023 GAAP EPS consensus estimate. In spite of its massive investments, Amazon is starting to become quite profitable.
2. Amazon's Margins Should Trek Higher in the Coming Years
Though Amazon has aggressively ramped capex over the last 18 months (and thus seen a spike in depreciation expenses) and has been contending with both higher wages and COVID-related expenses, its GAAP gross margin rose 250 basis points annually in the second quarter to 43.4%. The reason: Amazon's key higher-margin revenue streams -- specifically, AWS, seller services, subscription services and ads -- all grew much faster than its lower-margin Online Stores (direct e-commerce) and Physical Stores segments.
There are good reasons to think this mix shift towards higher-margin revenue streams will continue over the next few years. Amazon's marketplace sales have been steadily growing as a percentage of its total e-commerce sales; AWS is currently seeing 30%-plus revenue growth and near-50% backlog growth; and the company's "Other" revenue, which is dominated by ad sales, rose 87% in Q2 thanks to strong growth in both ad clicks and prices.
And as Amazon's margins continue growing, markets might be willing to grant the company higher multiples than the ones it's granting right now.
3. Amazon's Fulfillment/Logistics Moat Is Big and Still Getting Bigger
While the likes of Shopify (SHOP) and Walmart (WMT) have launched efforts to create alternative fulfillment infrastructures for online retailers to leverage, the fact remains that Amazon's network of warehouses remains in a league of its own in terms of size, geographic reach and economies of scale. In addition, those warehouses are now paired with a delivery infrastructure that handles well over half of all Amazon orders.
These assets, combined with the size of Amazon's seller marketplace and Amazon Prime's ability to leverage billions in annual subscription revenue to subsidize one, two and same-day deliveries, make it impossible for any rival to match what Prime does in terms of providing free and rapid deliveries for tens of millions of items. And this gap has only gotten wider during the pandemic: Amazon grew its fulfillment and delivery square footage by roughly 50% in 2020, and is growing it substantially this year as well.
Moreover, though Amazon certainly isn't immune to supply chain and inflationary pressures, the company's internal warehouse and delivery assets might allow it to weather the storm better than many peers.
4. A Slew of Early-Stage Businesses Could Boost Future Growth
Looking across the breadth of Amazon's offerings, there are several businesses that I think could collectively move the needle within the next few years. Chief among them:
- Grocery delivery. Though starting off at a disadvantage relative to bricks-and-mortar retailers that can fulfill grocery orders from their stores, the Amazon Fresh delivery service might be better-positioned over the long-term (thanks to Amazon's warehouse and delivery assets) to profitably support grocery delivery at scale.
- Video and non-marketplace ads. For now, the lion's share of Amazon's ad sales involve product ads appearing on its shopping websites and apps. But (via platforms such as Fire TV and Twitch) the company does have a burgeoning video ad business, one that would get additional scale if Amazon lands the rights to the NFL's Sunday Ticket package. Also, Amazon has begun stepping up its efforts to grow its e-commerce ad sales on non-Amazon properties.
- Fulfillment services for third-party marketplaces. Perhaps with an eye towards both growing its seller services revenue and appeasing regulators, Amazon has begun making its fulfillment services for orders placed on non-Amazon properties more competitive. Given how (as described previously) Amazon's fulfillment and delivery infrastructure is one of a kind, this presents a large long-term opportunity...if Amazon is confident that Prime and its seller marketplace will remain sufficient competitive advantages for its own e-commerce operations.
- Games. After a shaky start, Amazon's game studio unit has finally created a hit, via massively multiplayer online role-playing game (MMORPG) New World. And from the looks of things, new CEO Andy Jassy is eager to build on New World's success.
- New consumer hardware. Though Amazon's recently announced home robot -- the $999 Astro -- is more a proof-of-concept than a mass-market device, the story could be different for some of Astro's successors, as Amazon adds more practical features and hits lower price points. Meanwhile, the Amazon Glow, a $299 video-calling/gaming device for families, might just have the makings of a low-key hit. Either way, the ability of Amazon's hardware unit to innovate and think outside the box bodes well for its future top-line contributions.
5. Capital Returns Feel Like Just a Matter of Time
Amazon is now solidly profitable in spite of all its spending, and has about $40 billion in net cash and a blue-chip credit rating. And as is the case for other tech giants, greater antitrust scrutiny is likely to curb its M&A appetite.
All things considered, it feels like only a matter of time before Amazon's status as the only giant not to be actively buying back shares -- if only to offset the dilution caused by equity grants to employees -- comes to an end.
