About everything that can be written about Amazon (NASDAQ:AMZN) stock has been written in various investment and business publications over the past 10 or 20 years. Visionary company? Check. Dominating online retailer? Check. Dynamic and innovative founder? Check. Fastest growing retailer ever? Check. Disrupter in media? Check. Global leader in cloud services? Check.
Only rarely does one see stories about risk or valuation regarding Amazon stock.
A 430% stock return over the last 5 years may make investors happy or excited, but as the Securities and Exchange Commission (SEC) indicates in most investment-related documents, “past performance does not guarantee future results.”
With that in mind, here are six reasons the future for AMZN stock might not be as glamorous.
Amazon Stock: Growth Slowdown
The law of large numbers will inevitably affect Amazon’s revenue growth rate. Analyst estimates for revenues this year are $474 billion. Can you image the efforts it takes to sell half a trillion dollars in goods and services, and not only repeat that every year, but increase it by 20% as investors expect?
Amazon got a one-time revenue boost from the coronavirus pandemic. Of course this won’t repeat this year, as analyst expect revenue growth to decline somewhere in the low 20% range. After that, I project a sub-20% growth rate for the foreseeable future.
Capital Intensive Business
Amazon has been spending many billions on its infrastructure build-out for many years. But is the $40.1 billion spent in 2020 indicative of future capital expenditure needs?
Analysts seem to think so. At least the ones who have pegged capex at $38 billion in 2021 and $39 billion in 2022. That may provide $25-$30 billion in free cash flow. That seems like a large number on the surface, but in the context of Amazon’s $1.6 trillion market cap, it’s a drop in the bucket. It also provides a return similar to a 10-year Treasury bond.
With high inflation likely coming down the road, that free cash flow may be shrinking.
Government Intervention Threats
This issue will probably never go away. It’s just a fact of life when corporations get too big and powerful. Federal and State governments have been looking into Amazon (and other FAANG stocks) regarding issues such as antitrust enforcement, election interference, free speech, hate speech, worker conditions, low federal income tax payments and others.
Critics have run the gamut from diverse political characters such as Bernie Sanders, Elizabeth Warren and Donald Trump to name a few. The Federal Trade Commission (FTC) is even looking into Amazon Prime Video in conjunction with other streaming companies.
Bernie Sanders has been on a campaign to improve worker conditions in Amazon’s fulfillment centers. Meanwhile, Elizabeth Warren wants to turn it into a “platform utility.” Former President Donald Trump has claimed the company gets favorable deals from the U.S. Postal Service, which hurts them financially.
Whatever the issue, these likely won’t be going away anytime soon.
Unionization Efforts
In the small Alabama town of Bessemer (pop. 26,680), Amazon faces its largest union organization threat in the company’s history. Employees at a large warehouse located there are voting this month to unionize, an effort which has garnered nationwide attention.
They are not seeking higher wages or benefits as most Amazon employees are paid well above industry averages. They’re also offered comprehensive benefits, and there is plenty of opportunity for career advancement. What they want is better working conditions. Many employees and unions object to the often strenuous physical demands of the job.
The fears for the company, and subsequently for Amazon stock investors as well, is that the well-oiled machine that allows one-day or two-day delivery through Amazon Prime will be disrupted. If unionization occurs across the company’s vast network of infrastructure in the U.S., Amazon’s entire retail business model would likely take a sizable hit.
Wal-Mart Growing Faster
Although the Walmart (NYSE:WMT) e-commerce business is less than 1/5th the size of Amazon’s retail business, it grew 69% in the fourth quarter. Compare that to the estimated 40.6% for Amazon. This disparity in growth has been occurring for quite some time.
Keep in mind, e-commerce, or online sales are only about 21% of total retail sales in the U.S. This often shocking statistic is slightly misleading as retail sales include auto sales with their high price point and very few people buy their cars fully online.
Based on Walmart’s approach to online sales as an omni-channel provider — meaning they can leverage physical stores to increase e-commerce efforts — this growth disparity between the two companies is likely to occur for the foreseeable future.
AMZN Stock’s Valuation Looks Stretched
Amazon stock has almost always been expensive. I recall the Wall Street Journal saying 2 years ago that the stock “trades at 36 times all the money it has ever earned in its 22 years as a public company.”
Currently, the stock trades at 65 times 2021 estimated earnings per share and 46 times 2022 estimated EPS. Some say the 40% EPS growth may justify those multiples. However, stocks aren’t valued on 1 or 2 years of growth statistics. A stock is worth the sum of all cash flow that will be generated in the future.
On that basis, by using a Discounted Cash Flow calculation, Amazon stock looks to be about 35% over-valued.
If we assume double-digit revenue growth until the company hits $1 trillion in revenues and margins remain relatively stable due to competition in both of company’s core segments, the valuation comes out to approximately $2,250. The massive capital expenditures need in both of these business segments will not go away for the foreseeable future.
If History Is Any Guide
Based on the past 100 years of retailing in the U.S. in which very few retailers, if any, remain on top forever — it’s unlikely Amazon will be the future of retail. The question is what would replace it? Well, if history is any guide, the answer is “something else.”
On the date of publication Tom Kerr did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Kerr, CFA is an experienced investment manager and business writer who has worked in the investment and securities business since 1994.
