Amazon.com, Inc. Should Be the World’s Most Valuable Company

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Amzn stock - Amazon.com, Inc. Should Be the World’s Most Valuable Company

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For a moment, ignore the valuation concerns about Amazon.com, Inc. (NASDAQ:AMZN) stock. Ignore the fact that the AMZN stock price has risen 259% over the past three years, or that Amazon stock trades at 143 times 2018 earnings estimate.

And ask yourself: is there a business you’d more rather own than Amazon? If so, the list is short. Apple Inc. (NASDAQ:AAPL) has the world’s most dominant brand. Facebook Inc (NASDAQ:FB) is visited daily by 18% of the world’s population. But no company is better-positioned across so many spaces, cloud computing, online shopping, artificial intelligence, than Amazon.com.

It’s too optimistic to argue that valuation doesn’t matter, In fact, no statement better signifies a bubble. But as I’ve long argued, using P/E as a single valuation metric ignores the company’s continuing reinvestment into growth businesses and significantly understates its true earnings power.

As bullish as I’ve been on Amazon stock for some time, I’ll admit valuation is a concern. But investors generally have to pay for quality. And with Amazon poised to increase its ever-growing dominance, I’m hardly ready to turn bearish, even with the AMZN stock price at an all-time high.

Where Does Amazon’s Reach End?

Amazon’s reach simply is unprecedented. This week, a Morgan Stanley (NYSE:MS) analyst estimated its Amazon Web Services business alone would be worth $270 billion in five years. That figure is nearly half the company’s current market capitalization. AWS is significantly larger than cloud businesses from tech giants like Microsoft Corporation (NASDAQ:MSFT) and Oracle Corporation (NYSE:ORCL). And it’s not even Amazon’s most valuable business.

The core e-commerce business has completely upended the retail industry, leading to weakness at companies ranging from Macy’s Inc (NYSE:M) to Foot Locker, Inc. (NYSE:FL) to J C Penney Company Inc (NYSE:JCP). Stocks of distributors like W W Grainger Inc (NYSE:GWW) in the industrial space and Cardinal Health Inc (NYSE:CAH) in the medical sector have been pressured by fears of Amazon’s entry. The grocery sector still hasn’t recovered from Amazon’s purchase of Whole Foods, even though WFM has roughly 3% market share.

In some cases, Amazon has failed. Amazon Local Register aimed to compete with Square Inc (NYSE:SQ) – it lost. The Fire Phone turned out to be something close to a disaster. LivingSocial lost to Groupon Inc (NASDAQ:GRPN), who eventually bought the business for basically nothing.

But the sheer amount of stocks touched by Amazon shows the breadth of its reach. And, overall, the company has had far more successes than failures. And as the Alexa AI platform grows, e-commerce continues to take share, and new initiatives take hold, those successes will expand Amazon’s reach and its revenue.

Is Amazon Stock Too Expensive?

At a certain point, even something close to dominance of the U.S. consumer industry is priced in. But I don’t think we’re there yet.

It’s true Amazon looks ridiculously overvalued (emphasis on “ridiculously”) on a price-to-earnings basis. But two points need to be made.

First, Amazon’s free cash flow is much better than earnings figures suggest. Trailing twelve-month free cash flow suggests a more modest 58x P/FCF multiple. And it’s worth pointing out that Amazon isn’t making nearly as much profit, or generating nearly as much cash flow, as it should. Operating margins over the past 12 months are just 2%; double that figure to a level still well below peers, and suddenly the P/FCF figure is closer to 30x.

I’ve made this point before, but it is incredibly short-sighted to simply value Amazon based on trailing P/E. The company is investing literally billions of dollars in a number of areas, including aggressive pricing in its core business. At some point, the company will be able to harvest those gains, but there’s no point in doing so now. This is a company with $160 billion in annual sales that still managed to grow revenue a whopping 29% in Q3, even excluding the contribution from Whole Foods.

That creates a literally unprecedented combination of size and growth. As long as those growth opportunities persist, there’s no reason for Amazon to focus on profits, or even to care about its P/E ratio. That’s not a sign of a “bubble,” or of investors not caring about the long-term. It’s precisely the opposite. Amazon is investing now to boost profits down the line.

No, the AMZN Stock Price Is Not Too High

The fact is that if Amazon wanted to maximize current profits and bring that P/E multiple down, it could so – instantly. Adding just a couple points to pricing would boost those margins significantly and have little impact on revenue. But Amazon – unlike those bears – is focused on the long term.

And with that focus, there’s a strong case that it’s Amazon that should at some point be the world’s most valuable company. If that’s the case, AMZN stock likely has another 50-60% upside over time, and a path toward being the first company with a $1 trillion market capitalization. That’s the path Amazon is on. And until it veers off that path, I see no reason to stop being bullish on Amazon stock.

As of this writing, Vince Martin has no positions in any securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/amzn-stock-valuable-company/.

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