GuruFocus.com
- By Nicholas Kitonyi
With a stock price of about $1,675 and a market capitalization of over $820 billion, Amazon.com Inc. (AMZN) is still considered by many to be one of the most aggressive growth stocks in the market. This is completely against the norm that says small- to medium-cap stocks are ideal growth stocks.
This tech giant has been very busy during the last decade. Amazon has made crucial acquisitions central to its expansion goals, launched products that integrate well to its industry-leading ecosystem and, most importantly, managed to bring its bottom-line growth to the level befitting its top-line growth.
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The intrinsic value of AMZN
Last year, Amazon delivered one of its best performances since it was founded. The company's earnings per share more than tripled to $20.14 compared to $6.15 for the year 2017. Revenue also improved massively, topping $232.8 billion, an improvement of $55 billion from the previous year's $177.8 billion.
So, what's driving Amazon's rampant growth?
First, the company enjoys a massive business moat in the industry, giving it the flexibility to launch new products and make strategic acquisitions that will boost future growth.
One of the most disruptive services that Amazon introduced to the market in recent years is Amazon Prime, a subscription package that allows subscribers to enjoy unique privileges across all the services provided by the e-commerce giant, including free fast shipping for eligible purchases and movie streaming, among others.
The impact of this service in terms of revenue per member was well illustrated in a report published by Morgan Stanley research, which showed that on average, Amazon Prime subscribers spent $2,486 over a 12-month period, whereas non-Amazon Prime members averaged just $544.
This shows that Amazon Prime members are spending nearly five times as much as non-Amazon Prime subscribers, and with about 100 million members already subscribed to Amazon Prime, the company has strong potential to grow in the next few years given that it has more than 300 million members.
The company's growth potential is further demonstrated using key valuation metrics. For instance, Amazon's trailing 12-month price-earnings ratio stands at 83.07x while its forward 12-month price-earnings ratio is currently estimated at 42.15x. This suggests that either Amazon's earnings will nearly double in the next 12 months or the stock price will fall by close to 50%. The latter is highly unlikely given the general optimism surrounding the e-commerce giant.
As such, with earnings expected to grow tremendously, if the stock price adjusts to reflect the current trailing 12-month price-earnings ratio by the end of the year, this implies that there is significant upside potential for Amazon.
Another factor that demonstrates growth potential is the company's five-year expected PEG ratio, which currently stands at just 1.36x. Again, this shows that the company's growth for the next five years will make its shares appear cheaper based on the current stock price.
Although the company's stock currently trading around $1,675 might appear pricey for most retail investors, Amazon's long-term outlook, which is well supported by strategic acquisitions made over the last few years, is compelling enough to trigger investor interest.
The company's $13.4 billion acquisition of Whole Foods in 2017, in particular, has introduced a new revenue stream that could prove crucial for its long-term growth. Amazon is out to revolutionize the traditional grocery store industry, which is valued around $5.7 trillion globally.
Recent reports indicate that the online retail giant is planning to launch a new grocery store concept by opening 35,000 square-foot grocery stores in strategic locations to aid in its plans for quicker delivery of groceries to customers. Whole Foods will play a central role in actualizing this plan.
In summary, if there is a perfect example of a blue-chip stock that promises tremendous growth in the next few years, that would be Amazon. There could be a few candidates out there, but Amazon stands out as one of the most disruptive forces in the technology sector.
This e-commerce giant has transformed the consumer goods ecosystem in ways that make it a mainstay in the industry. Its strategic acquisitions continue to pay off and with more synergies yet to be harnessed, there is more to come from Amazon in the next few years.
Disclosure: I have no positions in the stocks mentioned in this article.
This article first appeared on GuruFocus.
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