If you’ve been following the stock market at all, you no doubt know that Amazon.com, Inc. (AMZN) stock has enjoyed a remarkable year-plus run. 2015 in particular was a Wall Street highlight reel: shares soared 118%, and the only S&P 500 member with better returns was Netflix, Inc. (NFLX) and its absurd 135% gain.
But 2016 is a very different beast.
The year started out with the most severe losses in the history of the stock market, as Chinese equities plunged, taking global markets with them, and oil prices stubbornly languished.
AMZN stock got hit even more severely than the average issue, and shares are down 17.3% to date, underperforming the benchmark S&P by nearly 13 percentage points.
In light of all this, Amazon stock owners now face a serious dilemma: Are shares simply pulling back after a long rally in which AMZN became overbought? Or is now a good time to double down on the stock and buy back in before the next leg up?
To buy or to sell? That is the question. And one Wall Street research firm has an unequivocal answer: if you think 39% is an adequate return, you might want to buy.
AMZN Stock: Thesis Unchanged
Bernstein Research released a note today taking a look at Amazon shares in light of fourth-quarter 2015 earnings, which Mr. Market wasn’t too happy with. Earnings per share badly missed the consensus $1.56 figure, clocking in at $1 per share. Revenue also came in below Thomson Reuters expectations, and despite soaring 22% year-over-year to $35.75 billion, didn’t match the $35.93 estimate.
Bernstein’s Carlos Kirjner and team weren’t much phased by the miss, and give AMZN stock a $770 price target and an “outperform” rating. They note that two major facets of their thesis didn’t change with Q4. Number one:
- “… AWS is the leading player in a fast growing market with great potential that will be dominated by at most three competitors, hence supporting attractive steady-state margins and returns;”
AWS is an acronym for Amazon Web Services, the e-tailer’s lucrative enterprise-facing, high-margin cloud-computing division. AWS is far and away the market leader there; Microsoft Corporation‘s (MSFT) Azure is the closest competitor and remains leagues behind.
Kirjner conservatively estimates that AWS revenue will exceed $37 billion by 2020, bringing a standalone AWS valuation to $200 billion. (The absurd margins mean each dollar of AWS revenue is valued higher by the market than a dollar of revenue earned by the core business).
The second part of the bullish AMZN stock thesis that didn’t change last quarter? Says Kirjner:
“… the Amazon retail business is more cost-efficient that [sic] brick-and-mortar retail and hence supports better margins and returns on a normalized basis. Nothing in Amazon’s 4Q15 results suggest otherwise.”
Helping those margins are yearly Amazon Prime subscription fees, which are now $99 annually. AMZN’s paying users grew 53% in 2014 and 51% in 2015, showing not only blistering growth but hardly any deceleration.
Bernstein figures that brings the total number of Prime members to an incredible 65 million, and projecting AMZN numbers out several years, Kirjner arrived at a fair value of $770 per share, or 18 times 2017 EBITDA (earnings before interest taxes depreciation and amortization).
While you can agree or disagree with the numbers, the rational remains sound, and anyone who has bet against AMZN stock in the past has, in the long-term, been dead wrong.
I won’t be making that mistake going forward.
As of this writing, John Divine was long AMZN stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
