It was a rocky climb with plenty of fumbles along the way. But Amazon stock (AMZN) - Get Report finally reached all-time highs on Tuesday, July 6 – and quickly zipped past the previous peak to end the Wednesday session valued at around $3,700 per share.
The Amazon Maven takes another look at the bull case and discusses whether, despite the historical peak prices, it may make sense to buy and hold Amazon shares.
(Read more from the Amazon Maven: Why Amazon Stock Climbed After Jeff Bezos’ Departure)
Fundamentals look rock solid
It is hard to make a bearish case against Amazon stock based on the company’s fundamentals. This is probably why not a single Wall Street analyst has a sell rating on AMZN, according to Stock Rover: 4 buys and 30 strong buys out of 34 experts.
The Seattle-based tech giant is the king of cloud infrastructure, controlling over 40% of the IaaS market. Amazon Web Services accounted for 60% of Amazon’s 2020 op profits, and the number could rise with gains of scale leading to margin expansion.
On the e-commerce side, the story is not much different. US online sales are expected to grow double digits in 2021, which is quite a feat considering the tough pandemic comps that were boosted by the stay-at-home consumption trends.
Few will question that e-commerce is here to stay for the long haul, and that Amazon will probably expand its leadership in this space as well. Jefferies has provided numbers to go with the idea:
“Well over 60% of consumers have continued and will continue to shop online, especially on amazon.com, more often than they used to.”
With business fundamentals favoring Amazon, the company’s cash pile has grown larger by the quarter. Compared to ten years ago, Amazon’s cash balance has increased tenfold (see chart below). For reference, Facebook’s and Microsoft’s have risen by a more modest six and three times, respectively.
(Read more from the Amazon Maven: Amazon Stock: Seesawing Through The First Half Of 2021)
Valuations: long term perspective
One aspect of the investment thesis that could scare investors away are rich valuations. With the recent spike in Amazon share price, of 16% in the past month alone, multiples have expanded: forward P/E is now 67 times from around 55 early in March 2021, and EV/FCF (enterprise value to free cash flow) has risen from 72 times in May to 83 times now.
But the Amazon Maven has recently explained how Amazon shares could be considered affordable, if one keeps a long-term perspective. Should the company grow earnings as expected through 2025 (it has done so well above expectations in the past several years), valuation multiples should decrease fast.
Based on current 2025 EPS consensus of $172, AMZN trades at a very modest 21 to 22 times today. Absent a market crash or Amazon’s unlikely fall from grace in e-commerce and cloud, it is very probable that the stock’s P/E will be substantially higher than the low 20s in four to five years, leading to higher share price from here.
The Amazon Maven has recently asked Twitter for an opinion on Amazon’s recent CEO transition. Will Andy Jassy be a better manager than founder Jeff Bezos? Below are the responses.
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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)