AMZN
☁️ Amazon demonstrates strong fundamentals with leadership in growing e-commerce and cloud (AWS) markets, though heavy R&D spending and debt impact free cash flow stability.
📊 Valuation analysis using PER and DCF methods suggests Amazon is reasonably priced relative to its history but potentially offers limited near-term upside based on current metrics and conservative growth projections presented.
📉 Technical analysis indicates a short-term downtrend. While the stock found support around $165, a level considered fundamentally more attractive, it currently trades near $190, suggesting caution.
@ClaveBursatilTV:
“Now let’s look at Amazon’s earnings report. As always, first, let’s look at the different business units, how the company generates revenue. In this case, we can see that Amazon generates revenue mainly through its e-commerce platform. Within its e-commerce platform, on one hand, it sells Amazon products, meaning it’s a company that buys and sells products, obtaining a profit from the difference between the purchase price and the selling price. And on the other hand, also through the sale of third-party products, meaning it charges a commission for sales made by other people. It’s also a company that generates a lot of revenue through digital advertising, both within its e-commerce platform and on streaming platforms, like Twitch. On the other hand, it has paid subscriptions on its Amazon Prime streaming platform and its cloud computing business segment, cloud infrastructure with Amazon Web Services. The most important business units for the company currently are the e-commerce platforms and the cloud computing segment. In these two business units, the reality is that the company has significant competitive advantages. On the e-commerce side, it’s the main player in the United States and Europe; specifically in the US market, it has more than 40% market share, with a large difference compared to its competitors. And it’s an industry that is growing and expected to grow between 8% and 10% annually for the coming years, so the company is very well positioned in this case. And on the other hand, within the cloud computing segment, we can see that it’s also a business with high barriers to entry, as a very large capital investment is needed to develop all this infrastructure. And today it’s a fairly concentrated market, mainly among three competitors: Amazon, Microsoft, and Google. We can see that Amazon is the leader, occupying the largest market share currently, and it’s also an industry that is growing strongly. It’s expected to grow on average 15% annually in the coming years. Regarding the digital advertising segment, Amazon is also an important player. Clearly, the leaders in this industry are Google and Meta. However, overall, the next company is Amazon. And we can see that Amazon’s advertising revenues have been growing strongly in recent years. As for the streaming platform business, clearly Netflix remains the main global leader. However, the next competitor is Amazon with Amazon Prime. Broadly speaking, we can see that Amazon is like an octopus, very diversified, has different business units, and also has an impressive level of revenue. It’s one of the companies with the highest revenue among all companies listed in the US market. Note that in this last quarter, it generated over $155 billion dollars with 9% year-over-year growth. The cloud computing segment grew at a rate of 17% year-over-year, already generating almost $30 billion dollars. And in terms of profit margins, it has a gross margin of 51%, an operating margin of 12%, and a net margin during this last quarter of 11%, with a final profit of over $17 billion dollars. At the operating income level, we can see that in the last 12 months, it had an operating income of over $71 billion dollars, growing it at a rate of 51% year-over-year. Regarding net income, the last 12 months show a profit of almost $66 billion dollars with a growth of 75% year-over-year. If we look at the operating income generated by the different business units, we can see that the company now breaks it down in its reports by the income generated in North America, the income generated internationally with its e-commerce, advertising, and subscription business units, and then it separately breaks down all the income from Amazon Web Services. In this case, we can see that operating income in the United States grew at a rate of 17% year-over-year. International market operating income grew at a rate of 12% year-over-year, and the operating income generated by the cloud segment grew 22% year-over-year. But the most interesting thing here is to observe that the cloud segment is the most profitable for the company, generating over $11.5 billion dollars in operating income, while the rest of the businesses generate only $1 billion dollars and $800 million dollars. Regarding the company’s growth in recent years, we can see that revenues have grown at a compound annual rate of 16%, operating income at 25%, net income also at 25%. However, note here that, for example, the free cash flow line actually contracted because the free cash flow from 2020 is greater than the accumulated free cash flow of the last 12 months for the company. And we can see this reflected in the profitability margins, where we see a gross margin around 49% these last 12 months, which the company has improved in recent years. An operating margin of 11%, which has also improved in recent years. A net margin also of 10%, which has improved in recent years, and a fairly unstable free cash flow margin for the company, averaging around 5%, but in some years with an even negative margin. This is mainly due to two reasons. First, it’s a company that makes very strong investments in research and development. These last 12 months, it has spent over $90 billion dollars on research and development. It’s one of the companies that invests most heavily in this regard, and while this represents a large expense currently, it can also be interpreted and translated into greater future benefits, as all this will later be put into a better offering of products and services. And the other reason is that it’s also a company with high levels of debt. This means that it often has to make interest payments or principal payments on this debt, and that generates significant fluctuations in its free cash flow. Note that this last quarter, the company closed with cash and equivalents of over $94.5 billion dollars, but it has a total debt amounting to over $133 billion dollars. That means a net debt of over $38.6 billion dollars, which, however, is a debt level even below the average this company usually operates with. This also goes hand in hand with it being a company that, unlike Google, does not repurchase its own shares, at least in recent years, but has issued new shares, and we can see that the shares increased during the last years at an average of 2% annually. In a way, that dilutes shareholder value, but if fundamentally the company is worth more and more, well, if the increase in the value of the company’s real economy grows at a rate higher than the number of shares in circulation, that will also translate into the shares being worth more going forward in the market. Moving on to the value estimation, first, let’s look at some valuation multiples for this company. We can see that it currently trades at a PER of approximately 30, which at first glance seems quite high. However, it’s the lowest PER in recent years for the company. The market has always valued it at a much higher PER multiple than other large tech companies. Perhaps because of what we discussed earlier, the company makes very strong investments in research and development. If the company didn’t make such large investments in this area, the profit it could generate would likely be much higher, and that would lead to a significant compression of the valuation multiple. Well, that’s up to each individual whether they are willing to pay a high PER valuation multiple or not. On the other hand, the price-to-sales ratio, which compares the price against the company’s sales, is at three, which is quite in line with the average price-to-sales ratio it has had in recent years. On the other hand, the price-to-book value is at 6.5. It’s also in line with the average of recent years. Regarding the price-to-free cash flow, it’s at 96, super high. The reality is that, as we saw earlier, it has a very unstable free cash flow, so valuing it using this multiple might not be the most appropriate. Beyond that, let’s try to do a valuation using the discounted future free cash flow method. We input all the company information: shares outstanding, debt, sales for the last 12 months, average free cash flow profitability, and average annual sales growth in recent years. Based on this data, we create three scenarios: conservative, moderate, and optimistic. The conservative with 8% sales growth, the moderate with 10% sales growth, and the optimistic with 12% growth. We leave the free cash flow profitability at 5% in all scenarios. And pay attention to this. We assign a price-to-free cash flow valuation multiple of 46, which is more or less in line with the average the market has assigned to this company in recent years, keeping in mind that it’s a quite high multiple, but it’s the one the market has assigned to this company in recent years. Under these three scenarios, we get an estimated value of $113 for the conservative scenario, an estimated value of $134 for the moderate scenario, and an estimated value of almost $160 for the optimistic scenario. Considering that the free cash flow generated by the company is very unstable due to its policy of strong capital investment, it’s difficult to value using the discounted future free cash flow method. That’s why we also do a target price projection using PER multiple valuation. For this, we’ll calculate the estimated earnings per share for the coming years, estimating a compound annual growth in earnings per share of 15%, which is lower than the 25% the company has had in recent years, and we assign a PER multiple of 25, which is also below the average the company has had in recent years, to have a rather conservative bias. In that sense, it gives us a target price for the next 5 years around $271 per share, which at the current prices the company trades at, near $191, gives us a potential upside of 42%, which if reached within 5 years would give us a compound annual return of 9.5%. Finally, to complement, we look at the technical analysis, viewing the weekly chart of Amazon. We can see it closed the week near $190 per share. It comes from a significant correction from its all-time highs, near $240 per share. However, let’s note that, at least from a technical perspective, it remains in a short-term downtrend, below the 200-week average, and for now, found significant support in the $165 zone. Complementing this with the fundamental view we had earlier, it seems that these are much more interesting prices to consider than the current levels of $190. Keep in mind that, for example, buying in the $165 per share zone, that compound annual return through PER multiple valuation would rise to 14% from the 9.5% calculated buying at current levels. As a conclusion, we could say it’s a company with very good fundamentals, a very consolidated business, quite diversified, with different business units in growing industries and with good projections for the coming years. And in terms of valuation, we could say it’s neither very cheap nor very expensive, rather at a reasonable price, and that from a technical perspective, the short-term trend remains bearish, having found support in the $165 zone, which becomes a much more interesting price when complemented with the fundamental view.”
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