Barry Schwartz, chief investment officer and portfolio manager at Toronto-based Baskin Wealth Management, has presented his favorite stocks: Amazon (AMZN) - Get Amazon.com, Inc. Report, PayPal and Charter Communications, with the cloud and e-commerce giant taking the top spot.
The expert has endorsed the bullish narrative on AMZN for the long term, as he sees compelling growth and earnings opportunity for the e-commerce king far into the future. Below are Mr. Schwartz’s two key arguments in favor of the Seattle-based company.
(Read more from the Amazon Maven: The Fed’s Tapering: What It Could Mean For Amazon Stock)
Higher costs are temporary
Expectations for the holiday season have been impacted by the global supply chains disruptions leading to potential shortages, higher shipping and labor costs. In addition, Amazon’s outstanding e-commerce results in 2020 have set the bar a bit too high for a 2021 that has not been quite as impressive.
Still, Mr. Schwartz believes that these are temporary headwinds. Amazon continues to do its homework, taking the necessary steps to grow and defend its dominance in e-commerce. The portfolio manager explained:
“Amazon is investing for the future. That’s what Amazon does. It doesn’t worry about transitory or temporary costs and, at some point, we think that sales are just going to rise so quickly that the operating leverage is going to start to kick in and Amazon’s going to have no choice but to gush profits. The exposure to cloud computing, that’s where the real money is made for Amazon. They have pretty amazing margins in that part of the business, and that’s still growing.”
(Read more from the Amazon Maven: Amazon Stock: Overcoming Growth And Margin Woes)
Amazon keeps innovating
As Mr. Schwartz has argued, Amazon’s ability to keep innovating will be the company’s powertrain to keep growth at a healthy pace:
“Every day there’s a new announcement, new things that they’re working on, new technologies. So, this is the dominant company. I think you have to own some of these tech giants, and this is one where [the stock] really hasn’t run up too bad lately.”
Growth stock for the price of value
Mr. Schwartz added that, at the current earnings multiples, AMZN is not priced so much as a growth stock anymore. His quote:
“The valuation, it’s now becoming almost a value stock even at 60 times forward earnings. […] We all know Amazon can have higher profits whenever it wants. It just has to raise prices but it’s doing the opposite.”
This is not the first time that we see an argument about Amazon’s pricing power. Recently, we published JPMorgan’s Doug Amnuth’s thesis on the company’s ability to raise subscription prices on Prime, and how this could be highly accretive to earnings. Mad Money host Jim Cramer has gone even further, when he argued for Amazon stock as a beneficiary of higher inflation.
On valuation, it is interesting to note that a 60 times 2022 earnings multiple becomes a meager 24.5 times 2025 EPS, using analysts’ estimates published on Seeking Alpha. Provided that Amazon continues to deliver results at least on par with consensus, it is hard to imagine a stock like AMZN trading for such low multiples in three years.
Recently, we asked if Amazon was a good stock to hold through an environment of monetary tightening: a deflating Fed balance sheet and rising short-term rates in 2022. What do you think? Feel free to chime in below!
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Amazon Maven)