Amazon.com, Inc. (NASDAQ:AMZN) is down 11.5% from its July 15, 2019, high of $2020.99 and might now be a buy. Right now AMZN’s market value is below $900 billion and may be the right entry point for investors who like its growth prospects.
Amazon reported sales up 20% for the second quarter, which reflected gains in both products and services. Its operating cash flow was up 65% over the last 12 months. Moreover, AMZN made $25 billion in free cash flow in the past year.
Many people are still put off by Amazon’s high price-earnings (P/E) ratio, though. As of this writing, AMZN trades hands at more than 70X earnings, even at today’s lower price. But its valuation is not that high if you consider the following.
Looking at AMZN’s Valuation
At its $866 billion valuation, AMZN has a free cash flow yield ratio of 2.9% (i.e. $25 billion in free cash flow divided by $866 billion), which is not that expensive. Other internet stocks have similar FCF yields: Facebook (NASDAQ:FB), for example, has a 2.5% FCF yield for the past year.
Amazon’s growth is on a roll, especially with its recurring revenue products. Prime is extremely popular, especially now that the company is transitioning to one-day delivery for over 10 million items. In addition, Fire TV subscribership has grown to more than 34 million active users.
Analysts estimate that earnings will hit about $24 per share, up over 19% from last year, considering its per-share earnings (EPS) of $12.24 for 2019 so far.
If this 19% earnings growth continues for the next three years, the stock would have a P/E of just 44x.
Amazon’s Balance Sheet
Amazon’s balance sheet is also in great shape. It has over $41 billion in cash and securities and only $23 billion in long term debt. This is after having spent about $14 billion in capital expenditure over the past twelve months.
Looking forward, growth is expected to continue. Services like Amazon Web Services (AWS), its online cloud hosting business, now account for 43% of sales through June 30, up from 39% last year. Its geographical reach is also growing, with its international segment up 17% during the past quarter.
Bottom Line on Amazon Stock
All in all, expect AMZN to continue to show growth in free cash flow, which really seems to be what is driving the stock on a fundamental basis. Although AMZN does not pay a dividend or buy back its shares, it now has sufficient room in free cash flow to potentially do so sometime in the future.
The patient investor, who is willing to ride the stock for its growth, understanding that its free cash flow yield is actually not that expensive, should take advantage of this dip from the peak.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities.
