Amazon.com (NASDAQ:AMZN), which briefly reigned as the world’s most valuable company last year, with a market cap of over $1 trillion, is number one no longer. Amazon stock is not even number two.
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As of the early afternoon of Feb. 27, Amazon is the third most-valuable company in the world, behind Microsoft (NASDAQ:MSFT)and Apple (NASDAQ:AAPL). With a market cap just shy of $800 billion and Amazon stock price at $1,627, Amazon stock remains in bear-market territory, as it peaked last September 4 at $2,039.
AMZN can blame itself for this. The company’s missteps on its HQ2 decision angered New Yorkers, both when it said it would move there and again when it said it wouldn’t. Its $5 billion in profit angered Bernie Sanders.
But is Amazon really that bad? Can it really be worth $200 billion less than it was just six months ago?
The Bull Case on Amazon Stock
Amazon’s fourth-quarter report. issued on January 31, revealed the company is still growing 20% per year and becoming a profit machine.
With 2018 sales of over $232 billion, Amazon is now selling for less than four times its sales. With net income of $10 billion and earnings per share of $20.12, its price-earnings ratio is 81. The big number for Amazon remains its operating cash flow, which came to $30.7 billion last year. You’re paying 26 times that if you buy Amazon stock today.
All this for a company that still beats Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) and Microsoft in the cloud, with 2018 cloud revenue of $25.6 billion, almost 47% more than a year before. The company’s profit margin on enterprise-cloud revenue was 28%,and the business generated over 70% of its total net income.
Amazon stock price fell $60 per share after those earnings because it said it would increase its investments this year, and that its growth would slow. In other words, people sold AMZN stock because the company is investing in its business and because it’s hard to increase big numbers.
Fear of Walmart
Over the last year, the owners of Walmart (NYSE:WMT) stock have done just as well as those of the owners of Amazon stock, and pocketed $2.12 per share in dividends as well. A mere 3% gain in Walmart’s top-line growth, to $514 billion, sent analysts into raptures, thanks to e-commerce sales growth of 43%.
Most of Walmart’s e-commerce gains came from its grocery pick-up business. Those are sales that Walmart likely would have had anyway. And does Amazon’s retail-sales volume matter anyway, given that over half of them are on behalf of third-party merchants?
That is Amazon’s biggest problem right now. It doesn’t fully control the prices of what it sells, which is why its “house brands”that impose discipline on third-party sellers, are important,.
Analysts should have also expected Whole Foods’ sales to decline, since Amazon turned Whole Foods from a premium-priced grocery into one with mainstream, or even bargain prices. Whole Foods’ sales dropped 3% last year, but now that AMZN is opening more Whole Foods stores, the supermarket’s sales should rebound.
The Bottom Line on Amazon Stock
Amazon is still growing like a weed. Its cloud business is not only profitable, but it allows Amazon to expand into areas like banking and health care, and to grow its global footprint. AMZN has the biggest share of the growing voice assistant business with Alexa, it’s getting into machine learning through SageMaker, its studio is winning awards, and its delivery infrastructure is growing on land and in the air.
Now that Amazon is making money, however, analysts are evaluating Amazon stock based on the company’s profits and profit expectations. Analysts see politicians, regulators and tax men coming after the company and start thinking it’s just another merchandiser, like Walmart.
It’s not. Amazon remains the biggest cloud vendor, and the biggest user of cloud resources, on the planet. Is that worth $1 trillion today? Maybe not. Should it be worth $1 trillion a year from now, or two years from now? Probably.
As a result, anyone under age 70 should buy Amazon stock.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now 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 AAPL, AMZN, and MSFT.