In a world where trillions of idle dollars are looking for a return, a business model that works in the pandemic is a pearl of great price. Amazon (NASDAQ:AMZN) is the brightest such pearl, and Amazon stock is doing quite well as a result.
As I have been writing since 2014, and repeated many times here, Amazon is an infrastructure company. It’s not a merchant, it’s not a cloud, and it’s not a TV network. It’s infrastructure for making commerce happen in an Internet age.
With the pandemic that infrastructure is firing on all cylinders. Amazon had nearly $40 billion in operating cash flow during the first quarter alone. When it reports results on July 30, analysts hope for earnings of $1.84/share.
But that’s not the point, my friend.
Amazon Save Us
Of all the essential services in a COVID-19 wracked economy, Amazon is the most essential.
Amazon can break bulk and deliver products to your door for less than it costs stores. Amazon Web Services, its cloud network, lets tens of millions work from home productively. This will change the world as it comes out of the pandemic, making a lot of people, and office space, redundant. Amazon Prime Video, Kindle e-books, Twitch gaming, and Music services provide low-cost entertainment of all kinds around the world.
The world of 2021 will be vastly different from that of 2019. Amazon is our magic carpet to that future. For people who can afford the $120 a year to be part of Prime and can work at home, we’re getting there in something like comfort.
Amazon is unique in doing all these things at once, which is why it entered trade July 15 with a market cap over $1.53 trillion, and a price to earnings ratio of 173. Critics are focused on that market cap, and the portion held by founder Jeff Bezos is now worth $182 billion.
But Amazon revenues this year will still be barely half those of Walmart (NYSE:WMT), its cloud revenue will be lower than that of Microsoft (NASDAQ:MSFT), and all its Alexa devices are still a pimple Apple’s (NASDAQ:AAPL) rear end.
Amazon can grow a long way without offering legitimate antitrust concerns. This doesn’t mean policymakers don’t want to hammer it or the other Cloud Czars. It does mean Amazon can make it all go away by saying the magic word.
Alibaba (NASDAQ:BABA). Break up our clouds and you’ll serve China’s. Next question.
Trouble Ahead for Amazon Stock
It’s true, however, that we may have reached peak Amazon. For now.
Amazon shares held a trading range of $1,500-$2,000 for almost two years. Only since the pandemic lows has it really broken out to its July 15 price of $3,050. It did this without a change in its fundamentals. The whole gain was a valuation expansion.
Amazon is now worth over five times its sales. This despite the fact most of the revenue comes from retailing, usually valued at less than 1 times sales. It’s now worth about 40 times last year’s $38.5 billion of operating cash flow. It pays no dividend, nor is it likely to in the foreseeable future.
Amazon’s hiring is slowing, especially in Seattle. Warehouse storage space is getting tight. Content costs are rising. Walmart is still competing. The crown does hang heavy on Bezos’ furrowing brow.
The Bottom Line
Based on standard investing metrics, Amazon is overpriced right now.
Still, look around at how lucky you are if you have 50 shares in your retirement account. I said years ago that Amazon, like Apple, is a stock you hold, not one you trade. I continue to believe that.
In 10 years, Amazon stock will be worth much more than it is today. This will be true even if Washington tries to break it up. Amazon is essential infrastructure, privately held. It is the most important company in America, even if the third most valuable.
I just wouldn’t buy any here.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT, AMZN, AAPL, and BABA.
