I’ve been pounding the table for Amazon.com, Inc. (NASDAQ:AMZN) stock for quite a while now. But even I am stunned at the rally in AMZN stock over the past few months.
Again, I’ve been a big-time Amazon stock bull. In September, I called it the best buy in tech. Two months later, I argued that Amazon — not Apple Inc. (NASDAQ:AAPL) or Alphabet Inc (NASDAQ:GOOGL) — should be the world’s most valuable company. But in that November article, I wrote, “AMZN stock likely has another 50-60% upside over time.”
AMZN has risen 30% just in those three months — a gain I, by no means, saw coming.
Admittedly, the gains seem like they could be too much. Amazon has added $250 billion in market value since hitting $938 back in September, less than five months ago. Only sixteen US-listed companies have as much market value as Amazon has added in just a few months. AMZN stock now trades at a whopping 96 times forward earnings. And even though I’ve long cautioned against focusing solely on AMZN’s price-earnings ratio, that’s a huge number.
It’s possible Amazon stock is due for a pullback. But the knee-jerk arguments that its valuation is a sign of some “bubble” in tech or the markets as a whole — or that AMZN should be worth 30x earnings and, thus, something closer to $450 — don’t fly. And longer term, there’s still upside to AMZN stock. I still believe it will be the first trillion-dollar company, which itself suggests another ~40% upside from current levels. And when considering the performance of Amazon as a company, it’s hard to see what price truly could be too high.
The only thing perhaps more staggering than the performance of Amazon stock is the growth in Amazon sales. Amazon generated $136 billion in revenue in 2016. That figure grew by 31% in 2017 — thirty-one percent! The Whole Foods acquisition, per figures from the company’s 10-K, added 6.5 percentage points of growth. Still, Amazon grew its business by one-fourth — adding roughly $34 billion in revenue in a year.
To put that figure into context, The Coca-Cola Co (NYSE:KO) is expected to generate $35 billion in sales this year. Massive companies simply do not generate the kind of growth that Amazon does.
And that growth isn’t coming to an end anytime soon. Physical store growth will continue, including store count expansion for Whole Foods. Amazon Web Services is well ahead of Microsoft Corporation (NASDAQ:MSFT) and Alphabet in cloud (and Amazon recently passed Microsoft in terms of market capitalization). There’s the possibility of entering into the medical distribution field. Amazon has the opportunity to drive billions of dollars in advertising profits.
Simply put, Amazon has so many opportunities for growth that it’s unlikely to see growth slow down for years, at least. That’s even assuming Amazon fails in some of its efforts — as it has in the past. (Remember Fire Phone?) And what the history of AMZN stock shows is that, as long as Amazon is posting torrid growth, the stock price will rise.
Is AMZN Stock Too Expensive?
Investors bearish on, or even just skeptical of, Amazon stock would retort that while sales might have grown in 2016, earnings didn’t. In fact, operating income declined 2% year over year in 2017. Free cash flow fell 20%.
But should Amazon earnings be growing right now? The company is investing billions of dollars in new initiatives. It’s using cutthroat pricing to gain market share. It’s spending additional billions on infrastructure and logistics.
The argument that Amazon’s P/E ratio is too high ignores the fact that the “E” is deflated by those investments. And it should be. Again, Amazon is posting organic growth of 25%. It should be hiring thousands of workers and building a second headquarters and improving its supply chain capabilities. It shouldn’t be maximizing earnings right now — or paying a dividend. There are too many fruitful investments to make right now.
What is Amazon stock worth, then? It’s truly difficult to calculate accurately without a heavy dose of the “garbage in, garbage out” problem. But one way to consider the issue is to understand just how valuable Amazon’s various businesses are — or could be. Consider that Amazon, arguably, could be worth the total of:
- Oracle Corporation (NYSE:ORCL), worth ~$195 billion backing out its net cash.
- Walmart Inc (NYSE:WMT), worth ~$340 billion including net debt.
- 50% of Netflix, Inc. (NASDAQ:NFLX), given Amazon’s lower market share, which works to roughly $65 billion.
- Plus the value of its efforts in healthcare, grocery (it paid ~$14 billion for Whole Foods), hardware, artificial intelligence (Alexa) and elsewhere.
These are rough estimates, admittedly, but they suggest Amazon is worth at least $615 billion — or roughly $1,300 per share. And I’d rather own Amazon than Walmart. I’d rather own AWS than Oracle.
AMZN stock isn’t cheap — and I’ll admit even I’m surprised at how fast AMZN has climbed of late. But investors are buying a business — and this is a business whose performance literally is unprecedented.
That’s not necessarily worth any price, but it’s worth a big price. And I expect investors to keep paying that price until something changes dramatically.
As of this writing, Vince Martin has no positions in any securities mentioned.