Is it the right time to invest in Amazon?
Opdateret: 3. maj
This is my third post about the FAANG stocks. In this analysis I will look into Amazon and determine if it should be part of your portfolio, and at what price.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
I do have some experience with Amazon, as I have often bought books and other items from Amazon. The reason I use Amazon is because of their wide range of products and I do like AmazonSmile where I can support my favorite charitable organization (please donate if you can). I do not watch much TV, so I do not have any experience with Amazon Prime Video. As always my review with be unbiased and me liking or disliking the company, will not affect my analysis.
Amazon is a multinational technology company that is based in Seattle, which focuses on e-commerce, cloud computing, digital streaming and artificial intelligence. I do not want to go too much into details about the company as I expect that everyone already knows it. Instead I would like to look into their moats. I do believe that Amazon have at least two moats, which are both quite obvious. The first moat is the brand moat, as it is well known and consumers trust the Amazon brand. The other moat is a price moat, meaning that Amazon can price their product lower than their competitors. Later we will look into the numbers but let us first have a look at their management.
Their CEO is Jeff Bezos. Besides being the CEO he is also the founder of Amazon. If you have read any of my previous analyses, you would know that I really like when the CEO is also the founder. I do believe a founder in general are more passionate about growing the business and not only their wallet. Jeff Bezos has a degree in electrical engineering and computer science from Princeton University. Prior to founding Amazon he has experience from the telecommunications and banking industries, where he held different positions in various companies. As a CEO his results speak for themselves, he has lead Amazon from selling books from his garage to the empire it is today, I don't really think words can express how impressive that is. While his results talk for themselves, it is also important to look into his leadership. Luckily, the leadership principles are available on Amazon's website, and stated as such: Customer Obsession, Ownership, Invent and Simplify, Are right a lot, Learn and be curious, Hire and develop the best, Insist on highest standards, Think big, Bias for action, Frugality, Earn trust, Dive deep, Have backbone; disagree and commit and Deliver results. It is quite a lot of principles and reading what former employees say about Jeff Bezos, he is definitely a very demanding boss. I guess being demanding is what made him and Amazon be what it is today, and while he might be a tough boss, the results clearly talk for themselves. Remember that Jeff Bezos will step down as CEO the 5th of July 2021. Andy Jassy Amazon's cloud-computing boss will take over as CEO.
We have determined that Amazon has a brand and price moats. We really do like the management as well. Now let us look into the big five numbers in order to see if Amazon does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all of the benchmarks. I was quite surprised to see that the older benchmarks do not live up to the requirements. However, lately the benchmarks do and they also keep growing, as I like. It isn't something that concerns me but I was just a bit surprised.
The next numbers we will look into are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. While they do not always increase from benchmark to benchmark, they are certainly impressing and well above the 10 % requirement in all of the benchmark.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. We see impressing numbers in all of the benchmarks and while they aren't necessarily increasing from benchmark to benchmark, you have little to worry about with numbers like these.
The Equity Growth Rate in all benchmarks looks fantastic. It is well above our requirements and it is great to see them growing steadily from benchmark to benchmark. Not much to say other than the equity growth rate for Amazon is truly amazin.
Finally we look into the Cash Growth Rates. Once again all the benchmarks are well above the requirements and are impressing. Once again it difficult to find anything bad to say or any concerns when looking at the numbers. Amazon delivers in all benchmark and has done a tremendous job.
To shortly summarize the five numbers from Amazon. While the most important numbers (ROIC) look underwhelming in the older benchmarks, the requirements are fulfilled in the later benchmarks. It is certainly not something I would be concerned about . It is hard to say anything bad about the Cash Growth Rates, Sales Growth Rates, EPS Growth Rates and Equity Growth Rates as they are just fantastic in all benchmark in all growth rates. There is really nothing bad to say at all, and based on the historic numbers, investing in Amazon looks like a good idea.
Another important thing to look into is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculation on Amazon, I can see that Amazon has 1,49 years earnings in debt, which is acceptable.
Obviously Amazon is a great company and it will most likely continue to grow due to their innovation and because of their strong moats. However, we also have to look into some risks in investing in Amazon, as no investment is without risk. I do not see competition as much of a risk due to the strong moats, meaning that the largest risks are the antitrust charges that Amazon might face. We already know that the European Commission has informed Amazon that it has breached EU antitrust rules by distorting competition in online retail markets. Amazon might also face antitrust charges in the US, as they are part of the 499 page long report by the antitrust subcommittee of the House Judiciary Committee. It is impossible to know how these antitrust investigations in the EU and US will end up affecting Amazon, which means it is something that needs to be monitored if you are invested in Amazon. Other risks could be lower revenue growth in the future, as it could be difficult for such a large company to continue to grow at such a large rate.
All right, we have gone through the numbers, potential and risk regarding Amazon, and now it is time for us to calculate a price for Amazon. In order to calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use a EPS as it is now at 52,57 (which is historically high). I chose a Estimated future EPS growth rate of 15 (which is the highest possible growth rate I use), Estimated future PE 30 (which the double of the growth rate, as the historically PE for Amazon has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $1.577,10, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Amazon at price of $788,55 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". In order to do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The operating Cash Flow last year was 66.064. The Capital Expenditures was 40.140. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I wasn't able to find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 28.098 in our further calculations. The Tax Provision was 2.863. We have 504,32 outstanding shares. Hence, the calculation will be like this: (66.064 - 28.098 + 2.863) / 504,32 x 10 = $809,59 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 90,66 and a growth rate of 15 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $1.431,14.
I do believe that Amazon is a great company with a great management. Even though they are facing some risks, I see the company as having a great growth potential. I would open a position in Amazon if it hits the PAYBACK TIME price at $1.431,14. I know that Amazon will most likely never fall to that price, and despite Amazon having great historical numbers, great management and moat, I believe it is too expensive for the time being. Obviously, I would like to have a company like Amazon in my portfolio but I'm going to stick to my strategy and not overpay.
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