Amazon (NASDAQ:AMZN) stock has had a tremendous run since listing on the Nasdaq in 1997. Many investors might be wondering whether it’s time to cash out, hold or add to their positions in AMZN stock. The truth of the matter is that the dynamics of the stock have changed over time.
Amazon first came to prominence during the Dot-Com boom and bust. The company was one of the survivors after the bubble had burst, and it has taken full advantage of the reduction in the competitive landscape.
AMZN stock — still a growth name at the time — incorporated cost leadership and differentiation strategies in the early 2000s, which allowed them to gain further market share. Amazon’s organic business reached an inflection point at the turn of the decade. The company decided to acquire on both horizontal and vertical bases’ to increase value. This ended up being successful, as the stock has outperformed the S&P 500 by over 500%.
I think the stock’s set for further upside. Let’s see why.
AMZN Stock Looks Ready for Anything
First, some investors are worried about inflation. And when you’re in an inflationary environment as an investor, you really have two options. The first is to invest in vertically integrated companies. The second is to invest in companies that can take advantage of product switching.
Amazon has both of these properties as it has a considerable amount of negotiating power with its suppliers while supplying a vast range of products and services.
Additionally, there’s been a lot of speculation that we’re heading into a low-multiple-bias environment. Although the narrative might be true, Amazon’s price-earnings multiple of 62.59 should be taken in context. First of all, its P/E ratio has been amplified by high acquisition volume. Secondly, the PVGO (Present Value of Growth Opportunites) should be taken into account. After all, Amazon recently acquired several growth-stage companies of late, including Zoox, Selz, Metro-Goldwyn-Mayer, and Perpule. The future cash flows from these investments need to be taken into context.
One of the main reasons why big technology stocks have gained in the past two decades has been due to their data and asset acquisition strategies. While gaining a lot of synergies from vertical acquisitions and fending off the competition with horizontals, Amazon has expanded via conglomerate-type acquisitions such as Whole Foods in 2016 and the previously mentioned MGM deal.
These cross-industry acquisitions have allowed Amazon to diversify the business and de-risk its revenue generation.
Shareholder Value
Many investors forget that investing is about searching for a good deal for your dollar. Amazon is fundamentally strong as a company and is shareholder driven, in my opinion.
A couple of key fundamentals I’d like to highlight are the shares outstanding and the diluted earnings per share. Apart from Netflix (NASDAQ:NFLX), Amazon has the fewest shares outstanding out of any FAANG stock — the FAANG gang includes Facebook (NASDAQ:FB), Amazon, Apple (NASDAQ:AAPL), Netflix and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). The company’s strong cash flow has allowed it to utilize its reserves for growth instead of having to issue additional shares to do so.
Amazon’s diluted EPS has also increased significantly since 2018, which means that investors are gaining a lot of value for their invested capital.
Valuation
Despite Amazons’ tremendous bull run over the past two decades, the stock is still undervalued by 39%. The company has accumulated a tremendous amount of assets and hasn’t issued many shares since its inception (504.32 million).
Since Amazon doesn’t pay any dividends, I placed a five-year price target on the stock based on multiples. Assuming the forward P/E holds and looking at expected earnings suggests that investors could gain 400% or more.
The dynamic of the stock has changed over the years but Amazon is still a strong buy despite its high price. Amazon’s industry-beating efficiency and accretive acquisitions have allowed it to continue performing well financially. Factors such as earnings growth, shareholder value, and
On the date of publication, Steve Booyens did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa, and his articles are published on various reputable web pages such as Seeking Alpha, Benzinga, Gurufocus, and Yahoo Finance. Steve’s content for InvestorPlace includes stock recommendations, with occasional articles on crowdfunding, cryptocurrency, and ESG.
