Amazon’s (AMZN) - Get Report brutal selloff this past couple of weeks has seen its shares give up around 10%. Despite all the revenue growth this high quality company has generated this past year, this selloff creates a unique and highly compelling buying opportunity. Here’s why:
Investors’ Secret Sauce
The best way to grow one’s assets is to invest in great companies when others don’t want to. The coronavirus may pressure Amazon’s Q1 2020 results, however, it’s less likely to impact Amazon for the whole of 2020. Meanwhile, investors will be rewarded for buying a company with strong long-term prospects by acting now.
Warren Buffett reminds investors that when they buy shares of a company, they should think of it as buying up the whole business.
Indeed, investors would not purchase a business or a property considering only its prospects over the next 90 days or a year, but instead how the underlying business is likely to perform over the next four, five, or even ten years.
Untouchable Competitive Advantage
Amazon’s remarkable execution has put its retail operations years ahead of the competition. Amazon has been steadfastly focused on increasing the stickiness of its Prime platform. Amazon’s Prime program now has more than 150 million members around the world, with these customers ordering more frequently and spending more.
Put another way, although many retailers have to convince their customers on every purchase with comparisons made on quality and price, Amazon has become the default choice for many.
Furthermore, as Amazon continues to expand its one-day delivery service to include more products, customers are more likely to shop on convenience rather than on price, boosting Amazon’s revenue.
Peers Attempt To Copy, Yet Come Up Short
Prime is hardly a new offering, thus begging the question: why have its peers not copied this successful strategy? It turns out that Walmart (WMT) - Get Report is now looking to launch a similar program called Walmart+, which is likely to be priced around $98 per year.
Will Walmart’s strategy be successful? It’s doubtful, as simply attempting to copy Amazon’s offering, but with substantially fewer products, makes it unlikely to position Walmart for success.
Another crucial reason why Amazon is likely to benefit from its expanded Prime program comes from the fact that as Amazon ships a greater volume of products, there is increased product density with each delivery. This increases its shipping efficiency, which in turn renders improved profit margins for Amazon.
Valuation - Large Margin of Safety
As Amazon becomes bigger, it becomes harder to continue growing its revenues at 30%. Yet, as we saw during Amazon’s critical holiday season (Q4 2019), Amazon is still growing its revenues at a solid 20% rate.
Assuming Amazon can continue to grow its operations at close to 20%, investors paying up less than 25x trailing cash flows from operations are in no way paying a premium for the company.
Furthermore, Amazon has made it clear that it has no ambition to maximize cash flows at present, opting instead to continue to outdistance itself from its peers.
Amazon's stellar management team had the vision to carve out numerous rewarding opportunities in several niches. As a result, we should expect them to be equally able to take the foot off the pedal and ease up on investing for growth when its rate of returns from investments are no longer attractive.
Put another way, investors may yet come to see Amazon as a cash flow generating machine.
The Bottom Line
The coronavirus may impact Amazon over the coming few months, but it's unlikely to have any permanent effects over the coming year and even less likely longer term. Nonetheless, right now, investors are being offered a uniquely compelling opportunity to add Amazon to a well-diversified portfolio.