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Last week in Seattle, Amazon (AMZN) held an all-hands company meeting. When asked by an employee about the company’s future, founder and CEO said something that I don’t think most people would expect of any CEO, much less the CEO of one of the most disruptive companies in the world. “Amazon is not too big to fail,” he said. “In fact, I predict one day Amazon will fail. Amazon will go bankrupt.”
At first glance, his comment seems pretty surprising, especially given the way the company has expanded its presence from a simple online bookseller to a purveyor of just about anything and everything you might be able to imagine.
Not content with simply operating as an online retailer, and with establishing a dominating presence, Amazon is one of the most aggressive companies in the world when it comes to identifying opportunities to move into new businesses. No longer just an online retailer, AMZN has really expanded its business model over the past decade or so.
To keep pace with the tablet market, the company introduced its own line of e-book readers and tablet computers with the Amazon Fire product line. In a move that now seems prescient, in 2006 the company launched Amazon Web Services (AWS), aimed at cloud computing and data services; according to recent reports, they now own about 34% of the U.S. cloud market, putting them firmly in the driver’s seat in that arena.
Another smart move was the introduction Amazon Prime in 2005; initially started as a paid membership shipping service, in 2012 it was expanded to include streaming video and music content, and now stands as a strong competitor in the streaming media business with Netflix (NFLX). They also made a big splash last year when they finalized a merger with Whole Foods Market, giving them a foothold in the grocery market that put big-box retailers like Walmart (WMT) and Target Stores (TGT) on edge.
So why would the CEO of one of the most aggressive and disruptive companies with such a take-no-prisoners attitude about business make such a provocative statement? I think that when you read further, you get a good into the mindset that makes Bezos such an interesting figure in world business. He didn’t just stop at predicting his company’s doom; he expanded the discussion, explaining that large companies generally have lifespans that cover about three decades – not ten or more.
How could a company prolong its otherwise inevitable demise? By learning to “obsess over customers,” said Bezos. “If we start to focus on ourselves, instead of focusing on our customers, that will be the beginning of the end.” What I think you see is a glimpse into the mindset of an executive that has grown his company into one of the largest companies in the world by refusing to stand pat – not only by attacking new markets fearlessly and being willing to take big risks, but also by always looking for new ways to make the their customer’s lives better.
What does this mean for an investor? The stock has been one of the biggest growth stocks of this bull market, increasing in price from a low in late 2008 in the mid-$30 range to a September high above $2,050. Since that high, the stock has dropped a little over 27%.
Does this represent an opportunity to buy in at a discount? The problem is that just because a stock may have entered its own bear market territory – and 27% certainly means that bears are running a lot harder right now than bulls with AMZN – it doesn’t automatically mean the stock is a good value. AMZN has some very impressive fundamentals behind it, but as I think you’ll see, the value proposition offers conflicting information that to me translates to an increased level of downside risk.
Fundamental and Value Profile
Amazon.com, Inc. offers a range of products and services through its Websites. The Company operates through three segments: North America, International and Amazon Web Services (AWS). The Company’s products include merchandise and content that it purchases for resale from vendors and those offered by third-party sellers. It also manufactures and sells electronic devices.
The Company, through its subsidiary, Whole Foods Market, Inc., offers healthy and organic food and staples across its stores. The Company also offers a range of products like whole trade bananas, organic avocados, organic large brown eggs, organic responsibly-farmed salmon and tilapia, organic baby kale and baby lettuce, animal-welfare-rated 85% lean ground beef, creamy and crunchy almond butter, organic gala and fuji apples, organic rotisserie chicken. AMZN has a current market cap of $731,2 billion.
Earnings and Sales Growth: Over the past year, earnings increased a more than 1000%, while sales improved about 29%. Growing earnings faster than sales is hard to do, and generally isn’t sustainable in the long term, but it is also a positive mark of management’s ability to maximize its business operations. In the last quarter, earnings increased about 13.5%, while sales increased nearly 7%. The company operates with a margin profile that improved from 4% in the past twelve months to 5% over the last quarter.
Free Cash Flow: AMZN’s Free Cash Flow is more than $15.3 billion, which is impressive in terms of sheer numbers is very impressive, but considered against the scope of the size of their business gives a hint into the narrow room for error AMZN works with. Their Free Cash Flow Yield is a modest 2.07%.
Debt to Equity: AMZN has a debt/equity ratio of .63, which is a conservative number. Their balance sheet indicates more than $29.7 billion in cash against $24.6 billion in long-term debt.
Dividend: AMZN does not pay a dividend.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for AMZN is $80.01 per share. At the stock’s current price, that translates to a Price/Book Ratio of 18.69.
The stock’s historical Price/Book ratio by comparison is 20.56 and puts the top end of the stock’s long-term price target at around $1,645 per share. AMZN may be down since September by more than 27%, but that translates to just about 10% of upside potential. The real conflict comes when you factor in the stock’s Price/Cash Flow ratio, which is trading more than 41.5% above its historical average that puts a contrasting target price at only $882.32 per share.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: AMZN’s downward slide since September is impressive in both its speed and and depth; the strongly bearish momentum certainly also implies that the worst could still be yet to come, with major support for the stock sitting at around $1,400 per share.
A drop below that level could see the stock test the $1,300 level, with an even deeper low in the $1,200 level not out of the question. The stock has major resistance at around $1,600 per share and should be expected to act against any kind of sustained rally.
Near-term Keys: A short-term bullish trade is very speculative right now, and will continue to be unless the stock can push up to about $1,650 per share. That is a pretty good price level that could signal the long-term downward trend is about to reverse.
A much higher probability set up will be seen if the stock breaks down below $1,400 per share. That could provide a good signal to short the stock or start working with put options. The spread between the target prices offered by the Price/Book and the Price/Cash Flow ratios is so extreme that it’s hard to justify the stock as any kind of value-based investment.