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By Ian Bezek
| June 5, 2017
Amazon.com, Inc. (AMZN) continues to make its believers rich. Jeff Bezos' star continues to ascend, as he’s now piloted his firm’s shares to the highly anticipated $1,000 mark. The company’s earnings continue to grow, and new opportunities with Alexa and a potential pharmacy launch could generate even more growth. But will that be enough to power AMZN stock up further?
Some folks are suggesting that $1,000 will be the end of the line for Amazon stock, at least in the near-term.
Shares look mighty expensive just about any way you consider them. And key business divisions may be starting to lose some momentum. Overall, is AMZN stock still worth buying after this recent run?
Prices and data are from the original InvestorPlace story published on June 2, 2017. Click on ticker-symbol links in each slide for current prices and more.
At the end of 2016, Amazon stock traded around $750 per share. In less than half a year, Amazon’s stock price has now run up to $1,000 per share. That’s a 33% increase in a short period.
And AMZN hasn’t traveled alone. All major U.S. indexes are reaching new record highs now. Tech’s bellwether fund, the PowerShares QQQ Trust, Series 1 (ETF) (QQQ) is up almost 20% year-to-date. As much as the general climate, and earnings in particular have improved this year, it’s hard to justify the extent of these moves. AMZN stock has led tech higher all year, and will likely sell-off quickly at the first sign of a market correction. James Brumley expands on this point, saying $1,000 marks the point to start taking profits.
Amazon Web Services “AWS” is arguably the company’s most treasured asset. Its explosive growth over the years has repeatedly decimated bearish views on AMZN stock. However, AWS may be in for a slowdown.
Over the past year, AWS’ market share has stagnated, sitting flat at 40%. Meanwhile, leading competitors, including Microsoft Corporation (MSFT) are gaining significant market share from smaller competitors. Overall cloud growth is decelerating, and Amazon’s top rivals within the space are consolidating. This should, over time, lead to declining profit margins, slowing revenue growth rates and an overall less optimistic valuation for AWS. Make no mistake, Amazon has a great business here, but the market may still be assigning it too much value.
AMZN stock currently trades at a price-to-earnings ratio of 187. That’s outlandishly high. Now, any Amazon bull will tell you that earnings don’t matter. Look at cash flow or EBITDA.
They’re right, in that those look better. Amazon is clearly optimizing its business for cash generation, not accounting profits. But even on the bulls’ preferred metrics, Amazon stock still isn’t cheap. For example, Amazon is trading at 50x its free cash flow, compared to an industry median of just 17x. Similarly, its Enterprise Value/EBITDA is up to 36x, compared to an industry median of 12. With the stock price up so much lately, even valuation ratios that used to look better for Amazon now are hard to defend.
Amazon rolled out the Echo in 2014 to modest interest. Analysts originally saw the device mostly as a home music system. However, that quiet debut allowed Amazon to grab a huge lead. By the time competitors such as Alphabet Inc (GOOG, GOOGL) figured out what had happened, they were at a sharp disadvantage. Yes, competition such as Google Home is trying to catch-up, but Amazon has established a big, first-mover edge. Apple Inc. (AAPL) is set to launch its Siri speaker as well, but it is way late to the market.
While competition is merely trying to match Alexa’s features, Amazon is already powering forward with the new Echo Show. The Show rolls out this month, and will allow consumers to make video calls, monitor home security and other such visual-based features. Over time, it should serve as another tool to drive more transactions through Amazon’s retail business as well.
A recent report from CNBC suggests that Amazon may finally take the leap into online pharmacy. According to the report, Amazon has discussed this possibility annually for many years now, and it appears to be finally pulling the trigger.
An expert quoted in the article suggests this could be a $25 billion to $50 billion market opportunity for AMZN. Now, it’s uncertain whether the company will in fact launch this. Regulation of the sector is far more strict that most other areas where Amazon competes. But if it can succeed here, it’d open another big potential profit center for the firm.
Amazon’s latest quarterly report put in a solid beat on the earnings-per-share figure, and it has clearly paved the way for the run to the long-awaited $1,000 per share price. Net sales grew 23%, operating cash flow grew more than 50%, Prime continues to add members rapidly and the company issued solid guidance going forward.
It wasn’t all good news. Operating income declined, and all-important profit margins for North America declined. To be certain, this wasn’t a perfect quarter for AMZN stock by any means. But it was good enough to get the job done, and guidance suggests the rest of the year should be at least as acceptable.
AMZN stock is profoundly expensive here. Not just on earnings, but by almost any metric you want to use. The move up from $750 per share to $1,000 this year is hard to defend on any sort of fundamental basis.
Some people view Amazon stock as a must-own, simply due to its massive share of the digital economy. I understand the argument, and the stock remains a solid hold on that basis. However, I can’t see a rationale for purchasing more stock here. All signs point to a correction in AMZN stock coming along fairly soon.
This article is from Ian Bezek of InvestorPlace. As of this writing he held none of the aforementioned stocks.