Amazon (AMZN) is an American multinational conglomerate. The firm primarily operates in the e-commerce space with additional strongholds in other domains such as subscription-based services and on-demand delivery. I am bullish on the stock. (See Analysts’ Top Stocks on TipRanks)
What’s Changing at Amazon?
Amazon started in the 1990s as one of the foremost tech pioneers in the digital shopping space when it leveraged the internet and the consumer’s desire for a more convenient shopping experience. The firm really took off in the early 2000s when it started utilizing cloud software during a hypergrowth period of cloud development and utilization.
However, moving into the post-housing-crisis era, Amazon unknowingly slowly started diverting away from other big tech names with its differentiated acquisition strategy.
All the other FAAMG characters stuck to vertical and horizontal acquisitions within their sphere to add to pricing power and market share, but Amazon chose to embark on a cross-industry conglomerate style acquisition method, which has added a different kind of value to the company than other big tech firms.
Amazon has increased its cross-industry exposure via notable acquisitions of Whole Foods, Metro-Goldwyn Mayer, Zoox, Ring, Twitch, PillPack, and more.
Conglomerate acquisitions strategies add value in a different way to vertical and horizontal strategies. As a consequence, we’re likely to see more consistent earnings from Amazon than other big tech stocks as it now covers the full spectrum of the business cycle; however, the trade-off is that there will be diminishing growth of its exponential earnings trend due to broad-based capital allocation.
Because of Amazon’s differentiated acquisition strategy, we’ll need to view the stock as part of a different peer group as we have in the past. There have been many comparisons between Amazon and Walmart lately, which is testimony to the shift in investor classification.
Pricing the Stock
Having explained the scenario qualitatively, it’s necessary to provide quantitative substance to the scenario.
From a pricing perspective, we’re witnessing a downward trajectory in the stock’s weighted average cost of capital (WACC). The WACC forecasts the expected return to investors and lenders based on the firm-specific risk premium intertwined with the overall market risk. Amazon’s WACC currently sits at 6.7%; it was double digits just a few years ago.
The observed statistic perfectly explains the firm’s conglomerate acquisition strategy argument if we consider the decreasing expected returns in conjunction with an over 30% three-year decrease in the firm’s beta. Thus, it’s prudent to conclude that we’re likely to experience lower expected annual returns at less of a risk for Amazon stock.
Wall Street’s Take
Turning to Wall Street, Amazon has a Strong Buy consensus rating, based on 30 Buys assigned in the past eleven months. The average Amazon price target of $4127.50 implies 23.8% upside potential.
Concluding Thoughts
I expect a brilliant year from Amazon stock. Still, I think the risk-return dynamics of it is changing relative to the other big tech names due to its differentiated acquisition strategy. How Amazon has chosen to add value to its firm over the past decade has caused a shift in peer-group for the stock. Amazon stock will be less cyclical but more consistent moving forward.
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Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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