Amazon (AMZN) needs no introduction.
With over 200 million Prime memberships, Amazon’s global reach is growing massively in both its E-commerce, and its Amazon Web Services segments.
The company seeks to be Earth’s most customer-centric company, led by four principles: customer obsession rather than competitor focus, passion for invention, commitment to operational excellence, and long-term thinking.
These values have helped Amazon grow to be the fourth-largest American company in terms of market cap and soon to be the largest in terms of revenues, on its ways to surpass Walmart (WMT).
While the stock has rewarded investors massively over the decades, it has lagged the overall market over the past year.
In my view, considering Amazon’s growth and margin expansion prospects, the stock is rather undervalued. It is trading at historically very attractive levels, which likely suggests Amazon has notable upside from its current levels ahead. For this reason, I am bullish on the stock. (See Insiders’ Hot Stocks on TipRanks)
Amazon’s E-commerce revenues surged 40% in 2020 from 14.8% in the prior year, benefiting from the expanded lockdowns and constraints on physical retailers, which stimulated the shift towards e-commerce adoption.
While e-commerce revenue growth slowed down in Q2 2021, posting growth of 13% year-over-year, against 41% in Q1, it’s only natural after such a strong spike. Amazon is well-positioned to continue harvesting the ever-remaining positive trend of higher e-commerce sales over time.
Simultaneously, Amazon Web Services, the company’s other segment, is also posting impressive growth numbers. While the company has been growing the segment for years, growth appears to remain at exceptional levels, despite the cloud industry’s maturity over time. AWS posted a growth of 37% year-over-year in Q2 2021, which is the same rate the company had posted in Q2 2019.
Due to combining two businesses the parent company is also well-settled to attain superior margin expansion over time. This is evident in the company’s prolonged gross margin expansion trend. Gross margins have expanded from around 20% in 2010, to 32% in 2015, and 43.3% as of Amazon’s latest quarterly results.
This trend should be sustained as the company scales further, leading to gross margins north of 50% sooner rather than later at the current expansion pace.
The stock is currently trading at a forward EV/EBITDA of 21.1, which is at the lower range of the company’s historical average, while analysts expect EPS to grow annually anywhere from 25% to 45% annually in the medium term.
Amazon’s logistics and shipping infrastructure network makes for an unparalleled moat, as few to none other companies have the resources or expertise to match it.
By leveraging its complex network, the company allows third-party sellers to sell their assets through its website, while Amazon takes care of the rest (e.g., fulfillment).
No notable competitor exists in that field, leading to Amazon handling a growing chunk of the market.
Wall Street’s Take
Turning to Wall Street, Amazon has a Strong Buy consensus rating, based on 32 unanimous Buys assigned in the past three months. At $4,196.90, the average Amazon price target implies 27.8% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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