I am bullish on Amazon (AMZN) due to the company’s overwhelming competitive advantages, solid growth outlook, reasonable valuation level, and unanimous Wall Street bullishness on the stock.
Amazon is an American multinational technology company founded by Jeff Bezos. The company has four business divisions: Ecommerce, Digital Streaming, Cloud Computing, and AI, and is one of the Big Five companies in the American technology industry. (See Analysts’ Top Stocks on TipRanks)
Amazon is the provider of the largest online marketplace in the world. The company is one of the most influential economic forces in the world, and is arguably the most valuable brand in the world, worth over $1 trillion.
It is known for disrupting well-established industries through combining mass scale and rapidly innovating with technology. The company is the second-biggest private employer in the U.S.
In 2017, Amazon acquired Whole Foods Market for $13.4 billion, thereby significantly increasing its footprint as a bricks-and-mortar retailer. It has also made additional acquisitions over the years, including Twitch, IMDb, Ring, and Zoox. It is currently in the process of purchasing leading media company, Metro-Goldwyn-Mayer.
Amazon reported revenue of $110.8 billion, falling short of its expected $111.81 billion for the third quarter of 2021. This is in comparison with $96.15 billion revenue in Q3 of 2020. Amazon’s overall sales saw an increase of 15% year-over-year, reflecting a slowdown from the previous quarter’s growth rate (27%). However, the company was still able to achieve revenue over $100 billion for its fourth consecutive quarter.
The company’s earnings were reported at $6.12 per share as compared to the expected $8.96, and the $12.30 EPS from the same quarter of the previous year.
Amazon’s major online stores reported lower-than-expected sales in the third quarter of 2021, contributing to the slowdown of the company’s overall revenue. In addition, e-commerce sales showed an increase of 3% to $49.94 billion as compared to the third quarter of 2020, missing estimates by $51.53 billion.
The company’s result did get a boost from its Web Services cloud computing platform that saw a significant growth of 39% and reached $16.1 billion. This high-margin division has been outpacing Amazon’s Ecommerce unit. In addition, revenue from Amazon’s other business unit, which predominantly comprises advertising sales, increased by 49% over the last year, keeping in line with the rate in the third quarter of 2020.
In the fourth quarter, Amazon expects to see $140 billion of net sales, which is lower than the $142 billion consensus estimate. The company also reported operating income between breakeven and $3 billion, coming quite short of the $7.2 billion consensus estimate.
Amazon’s stock looks reasonably valued right now as its EV to forward EBITDA ratio is 23.8x compared to its five-year average of 23x and its Price to forward Normalized Earnings ratio is 87.69x compared to its five-year average of 101.1x.
Given the company’s competitive advantages, proven track record of innovation, and expectations for 22.1% EBITDA growth in 2021 and 23.6% EBITDA growth in 2022, this valuation looks reasonable.
Wall Street’s Take
From Wall Street analysts, Amazon earns a Strong Buy analyst consensus based on 30 unanimous Buy ratings. Additionally, the average Amazon price target of $4,088.17 puts the upside potential at 10.6%.
Summary and Conclusions
Amazon is one of the most dominant companies in the world, and continues to leverage its formidable competitive advantages to drive new avenues of growth.
While the stock does not look dirt cheap here, Wall Street analysts’ unanimous bullishness on the stock and its reasonable valuation multiples make it look promising.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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