December 2017

We continue our tour of the FANG stocks this week with an up-close-and-personal look at tech and eCommerce giant, Amazon.com Inc. (NASDAQ: AMZN). Let’s begin by listing a few fun facts about this stock (see if you can find the fact most relevant to this stock’s future success).

Fun Fact 1
Amazon is one of very few public companies that still have “.com” included in their formal business name.

Fun Fact 2
Amazon Founder and CEO Jeff Bezos wrote the original business plan for Amazon in a car, in 1994, while his wife drove him across the country to Seattle.

Fun Fact 3
Amazon is the most prominent tech company to survive and thrive following the tech bubble of the early 2000s.

Fun Fact 4
Amazon’s recent purchase of Whole Foods Market is the latest instance of its habitual disruption of established markets.

As you may have guessed, it’s the fourth “fun fact” that is currently dominating financial news headlines. Analysts and investors are carefully scrutinizing the Whole Foods deal, trying to get a sense of its implications for future profits and growth.

Let’s take a closer look.

The relevant key metrics for a stock analysis of Amazon.com Inc.

The Quintessential Growth Stock

With a very high price-per-earnings ratio of 163.41, it’s clear that Amazon’s strengths are not in its ability to generate wide profit margins. The Amazon business model remains faithful to the ideology of the late nineties dot-com bonanza—it’s about the aggressive pursuit of market share above all else.

For Amazon, first it was books, then music and DVDs, then household goods, and now the company is moving into AI (Alexa) and groceries. What Wal-Mart did to small-town retailers, Amazon threatens to do to Wal-Mart through the ongoing reinvention of retail consumption norms.

Despite its less than noteworthy profits, Amazon’s stock price has aggressively appreciated, especially since 2014, when the stock ended the year at a price of $310.35. Amazon broke $1,000 on May 30, 2017, and, as of fall ’17, continues to trade in the mid-to-high $900 range.

Since 2015, Amazon has grown by 215% - that's fast! Google and the Google logo are registered trademarks of Google Inc. Used with permission.

Google and the Google logo are registered trademarks of Google Inc. Used with permission.

Betting on Bezos

There is a mythology in the business community (a mythology likely steeped in truth) that Amazon Founder and CEO Jeff Bezos is the best there is when it comes to business leaders. His management philosophy has been both coherent and consistent, and he has a reputation for sharing it assiduously in his annual letters to shareholders.

Bezos maintains an intense customer focus.

He prefers to pay more attention to the intricacies of consumer demand than to the need to stay one step ahead of the competition. A lesser CEO might obsess over the latest developments at Ebay or Walmart.com and build the business around reactive one-upmanship. Bezos focuses on the big picture, and that’s the world of the consumer.

What do they want? What are they not ready for? How can Amazon provide them with the best possible deal?

New Low Margin Territory

Amazon’s Whole Foods Market play is a venture into a low margin business—grocery retail—by a company that is quite comfortable operating at low margins.

The Argus Analyst Report cites the Whole Foods acquisition as a “modest but not immaterial risk.” Argus contends that the most significant challenge awaiting Amazon is the ability of traditional retailers, such as Wal-Mart, Under Armour, and Black & Decker, to invigorate their online pricing schemes and shopper experiences, enough to make consumers begin to view them as viable alternatives in the space.

Might we also see established grocery chains roll out their own online ordering platforms in the near future? Will they be able to compete?

Tax Troubles?

Another big change that is steadily coming down the pike is Amazon’s broader participation in the payment of state taxes. There was a time not too long ago when most purchases from Amazon did not involve the payment of sales tax. Times have changed, and they keep changing. Today, Amazon collects state taxes in 39 out of 50 US states.

My Take

The conventional wisdom among most investors and analysts alike is that any good stock portfolio will include shares of Amazon stock.

There are just too many highly plausible visions for the future where Amazon appears to be front and center. From delivery by drone to household bar code scanners that automatically order restock shipments of bread, eggs and other grocery staples, not only is it difficult to imagine Amazon not being present, it’s difficult to imagine Amazon not being a leader.

Don’t let the high per-share price scare you off. One thousand dollars per share is a significant milestone, but with an aggressive growth stock, powerful enough to be a standing existential threat to a company like Wal-Mart, the prospect of two thousand dollars per share in the not-to-distant future is far from a pipe dream.


DISCLOSURE: The author does not own stock in Amazon.com Inc.

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This article is a part of our ongoing series that explores a different stock or fund each week. The information contained herein should not be construed as ‘financial advice’ and is presented as the opinion of the author.

ClydeBank Media does not offer financial investment services and has no ties to any of the funds presented in this list. Please see our full financial disclaimer regarding the information contained within this stock analysis. Always consult your financial adviser before making investment decisions.