Talking Stocks: Amazon.com, Inc.
Updated: Feb 8, 2020
We tend to rarely mention blue chip shares on any of our Stock Pick of the Week editions, because this group of companies usually lack high growth prospects: they’re reliable and a solid pick for grabs when times are tough instead.
However, with the dominance this company holds, its expansions, and stock price history, Amazon Inc. shares seems like an incredibly profitable purchase: with all of the aforementioned criteria pointing towards greater growth.
Thus, here’s an overview of why Amazon Inc. is a BUY for The Dividend Payout, and why it could be for you as well:
1. The Market: Will E-Commerce ever go away?
According to RepricerExpress, Amazon has recently been recording up to $17 million in sales each hour, with their hourly sales consistently increasing in the last decade or so. This level of continuous consumption suggests that consumers are beginning to derive more utility from convenience and variety, and with Amazon being a purveyor of almost every product you can think of, consumers are figuratively in heaven when it comes to Amazon's "one-day delivery" and choice of 353 million products. Ultimately, this signifies consumers' unlikeliness to cease their online purchases with this multi billion-dollar giant.
Figure 1: Amazon Sales Growth and Forecasts
The graph above depicts the level of growth Amazon Inc. sustains concerning e-commerce, with sales growing steadily each year and forecasts showing further continuance of this trend. We can imply that this is a result of Amazon becoming the go-to problem solver for consumers with their speed, reliability and pervasive product range providing individuals with the optimal customer experience. Additionally, the fact that NASDAQ estimates that 95% of transactions will occur online by 2030 suggests that we are likely to see an even greater number of consumers being pushed towards online purchases at Amazon.com.
With customers increasingly relying on online purchases to solve their demands, the titular question arises: will this market ever even diminish? Intuitively, it’s difficult to imagine so: consumers will almost always demand more, and Amazon already have an established position in being the answer to almost all product-related demands in the market.
When would sales ever have a reason to deteriorate?
Here's where macroeconomics steps in, as these factors can offset company revenues even when the business is fundamentally attractive. Macroeconomic sentiments - such as the current trade wars - as well as consumer incomes are generally the key indicators of how well companies perform: but even in both this cases, Amazon Inc. seem like they will be able to supersede. This is because, although escalating trade wars facilitate higher operating costs for retailers in terms of local goods and services, Amazon hardly hold any inventory (as of Nov. '16) and therefore these augmented costs would seldom affect them as a company.
Additionally, if consumer incomes deteriorate, this would generally imply turning towards cheaper alternatives such as local inferior goods (supermarket-produced goods). However, even in this case, most goods on Amazon tend to price match and therefore provide extremely low prices for customers, in which case their loyalty is likely to stay despite the fact that their incomes have decreased.
Hence, we can deduce that even in situations of negative macroeconomic sentiment and in scenarios of consumer incomes decreasing, both are unlikely to have a substantial effect on Amazon sales, which makes this company even more fundamentally sound as an investment.
2. Growing dominance in Cloud Services
As the practicalities of artificial intelligence begins to augment year-on-year, Amazon have timed themselves well enough to ride this hype train with stride.
On one hand, the company has integrated AI into its own business by implementing machine learning to place products at specific parts of the customers screen (based on their previous purchases), and also decide which products are likely to be in high demand at a particular point in time. This is beneficial because the e-commerce giant will be able to target the demands of each specific consumer with the help of AI, therefore translating into greater revenues if correctly implemented.
According to multiple analysts at highly-resourced financial institutions, the AI industry could be bringing in over $118 billion dollars a year, and the fact that Amazon are growing their share of this market suggests that they are on the correct trajectory to keeping a significant piece of this revenue for themselves.
With over $871 million invested into artificial intelligence and cloud services themselves, Amazon have diversified themselves away from the slow growing e-commerce market and aggressively penetrated an industry that’s valued in the 12-figures.
Downside: Due to the fact that AI is stemmed to bring in a myriad of income in the next decade or so, it’s no surprise that competition will be arising from every major economy across the globe. There are already several growing AI start-ups in China and Japan, which will ensure the fact that even though Amazon may hold a large stake in artificial intel in the US, it won’t be an easy task doing so on a global scale. Moreover, giants such as IBM, Microsoft and Apple are already in this market, so Amazon’s incredible cash holdings will be significantly required in order to offset the aforementioned AI multinationals.
3. Stock Price
Some would say that the growth and potential of the Amazon stock price is the eighth wonder of the world...and who wouldn’t agree?
Figure 2: Amazon Share Price History
Although growth has been somewhat steady since inception, the price from 2010 onwards shows an incredible amelioration that solidified Amazon’s place as one of the world’s leading companies. Because of this, over 44 analysts at major financial institutions have concluded that Amazon’s stock price could reach the $2,400 area if they uphold their current level of growth, with one analyst even targeting a $2,600 share price.
Based on the current value of the stock, it seems that a $2,400 price tag is extremely feasible.
Figure 3: Price vs Fair Value Comparison of Amazon Shares
Using a discount rate of 7.5%, the present value of each Amazon share is $2,069.28, which means that the current price is a 15% undervaluation of its fair value. This suggests that the company's shares as well as their tremendous growth is certainly not an effect of overhype, and the company’s assets along with their financials actually substantiate the stock price. Evidently, hugely popular companies that are overhyped and overvalued are the ones that tend to go bust, which is why the fact that Amazon is, in fact, undervalued once more emphasizes the firm’s growth prospects as well as their reliability as a holding in one’s portfolio.
So, what does this mean for investors?
In the short term, perhaps we will seldom see protruding growth levels because of poor macroeconomic sentiment in the markets; even if Amazon fundamentally sound, the overlying confidence in the economy is what truly controls prices, and this is currently hovering in a bearish area. However, in the long term, once we see markets dig themselves out of correction and pick up again, holding Amazon stocks is likely to be a very rewarding investment due to several of the reasons below.
They are market dominators, and have still intelligently expanded into the growing industry of AI after taking over e-commerce: a smart move in order to keep themselves relevant and grow even further in terms of revenues and product range. Even after this expensive expansion, they sustain a strong balance sheet with large cash reserves, thus ensuring that they don’t drown in debt or suffer negative cash flows. This is perhaps why their stock price consistently steady and almost matches the fair value, with space still left to further augment.
As we always say with Blue Chip stocks: feast on them when their down, and relish in the payout afterwards.
With the current economic environment, investors will be best served waiting until further drops until December, and then using their cash aside to buy shares at discounted prices; and when they're ready to do so, Amazon stocks certainly do seem like an attractive purchase for the profit-driven investor.