One of the best strategies for long-term outperformance is to ensure one owns shares in the best businesses globally, given that winners tend to continue winning.
The tricky part about this strategy is buying these businesses at the right price, given that the top 25 businesses globally rarely head onto the sale rack from a valuation standpoint. And, if they do, they don’t stay there for long.
However, with a ~35% correction in the Nasdaq (COMPQ), we’re finally seeing an increase in attractive deals available in the market.
One stand-out name is a retail juggernaut that needs no introduction: Amazon (AMZN).
Negative Outlook Already Priced In
Amazon is an $866 billion company in the Internet-Retail Sector that needs little introduction. The company was founded in 1994 by Jeff Bezos in his garage, beginning as an online bookseller just before the height of the Dotcom Bubble.
More than a decade later, Amazon had 30,000 employees, but it’s since grown to more than 1.4MM employees. It has become a massive business internationally with a growing Retail business, a leading position in the cloud infrastructure space (Amazon Web Services – 30%+ market share), and now Streaming/Advertising, with its Advertising revenues only behind that of Alphabet (GOOG), and its Streaming business which is in its infancy being second to Netflix (NFLX).
This impressive diversification and leading position in several areas have allowed the company to grow its annual revenue from $136BB in 2016 to $470BB in 2021.
The company accomplished this while reporting a 700 basis point increase in gross margins.
The result was that annual EPS soared from $0.23 in FY2017 to $3.24 in FY2021, giving AMZN one of the highest compound annual EPS growth rates among its mega-cap peers.
However, 2022 has not been kind to the stock. While sales were up 15% in Q3 to $127.1BB, quarterly EPS slid 10% to $0.28, and that was in addition to net losses in the previous two quarters.
The result is that Amazon is expected to post a net loss per share of $0.10 in FY2022, its weakest performance in a decade.
However, this was partially due to foreign exchange headwinds on sales, higher energy costs, and the sale of devices during Prime Day, where the company does not make money on the sales of its device but the usage of the device, meaning that this hurts profitability short term.
Fortunately, energy prices have calmed down since Q3; the company continues to win major contracts for AWS, and third-party sellers on its platform continue to grow, representing 58% of total paid units in Q3 2022 (+200 basis points year-over-year).
Finally, its streaming selection and offerings continue to improve, which should increase the churn of Prime memberships, given that the value proposition is better than ever.
Hence, for patient investors willing to wait out the weak 2022 results, the business has never looked stronger in terms of its ability to continue steamrolling the competition.
The Fundamental Case
From a valuation standpoint, Amazon is trading at a massive discount to its historical earnings multiple (10-year average: 122x earnings) and is even cheap based on its 5-year average earnings multiple of 68.
This is evidenced by AMZN trading at just ~47x FY2023 earnings estimates ($1.79) at a share price of $84.90, and it’s worth noting that these annual EPS figures don’t properly reflect the business’ long-term earnings potential, with FY2025 annual EPS estimates sitting at $4.18.
So, while the stock may look expensive relative to peers in the Internet-Retail space, it’s important to remember that it has a massive cloud business [AWS] which should give it a premium multiple.
In fact, despite the tougher year for its Retail business’ profitability, AWS enjoyed 28% year-over-year growth in net sales ($20.5BB vs. $16.1BB) and continues to be a powerhouse with little signs of slowing down.
Hence, the stock is becoming dirt cheap after its 55% decline from its highs, valued at just ~20.3x medium-term earnings (FY2025 annual EPS: $4.18).
The Technical Picture
Looking at the technical picture, most investors would likely conclude it’s best to stay far away from Amazon, with the stock below all of its key moving averages and recently making a new 52-week low as it lost the crucial $85.80 level yesterday.
However, stocks often re-test and undercut their lows when they’re trying to make a short-term or intermediate bottom.
See the Full Technical Analysis Report for AMZN
This is exactly what AMZN did yesterday, undercutting its previous low by 1% and potentially shaking out some weak hands at an obvious area to place stops.
More importantly, though, the stock is the most oversold it’s been since its December 2018 bottom and is testing a multi-year support level on its long-term chart with support in the $85.00 region during June 2019, October 2019, and March 2020.
This doesn’t mean that the stock must bottom here, but the probability of a short-term bottom looks quite likely here, and I would not be surprised to see the stock reclaim the $100.00 level at some point in the next six months, setting up a potential ~34% annualized return.
The Bottom Line
Based on what I believe to be a conservative forward earnings multiple of 40 for Amazon and FY2024 annual EPS estimates of $3.10, I see a fair value for the stock of $124.00 per share.
This translates to a 46% upside from current levels, and it conservatively assumes that Amazon delivers into the lower end of earnings estimates.
So, with the stock undervalued, heavily oversold, and the most hated it’s been in years due to two large earnings misses in Q1 and Q2 and softer Q4 guidance, I would view any further weakness in the stock as a buying opportunity.
Disclosure: I am long AMZN
The above analysis of Amazon (AMZN) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Is Amazon (AMZN) A Buy or Sell?
Based on MarketClub’s technical analysis tools, Amazon (AMZN) is in a strong downtrend that is likely to continue. While AMZN is showing intraday strength, it remains in the confines of a bearish trend. Traders should use caution and set stops.
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