Amazon.com Inc. shares have done very well for investors who have stuck with them, but the market has periods when it doesn’t do as well. During these times, investors who plan to hold on to the company for a few years may be able to buy it.
We said at the beginning of July of last year that Amazon AMZN 0.52% was the cheapest of the “Magnificent Seven” companies based on their forward price-to-sales ratio, which was calculated by using experts’ predictions of revenue for the next twelve months as a guide. Since July 2, 2018, the day before that story came out, Amazon’s stock has gone up 38%. This is during a great run for the market as a whole, as the S&P 500 SPX 1.15% returned 28% when dividends were reinvested. Amazon does not give a bonus.
Charles Lemonides, founder and chief investment officer of ValueWorks, a $330 hedge fund in New York, said that July of last year was a great time to buy Amazon stock and that he felt bad that he didn’t do so. Here you can see how well the ValueWorks Long-Biased plan has done over the long term.
Leomonides went a little further back and said that the stock had been “dead money for two-and-a-half years.” This is a chart for the last three years:
The last price of an Amazon share was $180.11 on Wednesday. This is less than what the stock was worth in November 2021. Amazon’s stock has gone up 99.5% over the last five years, less than the 109% gain on the S&P 500. But Amazon’s stock has gone up 986% over the last 10 years, while the S&P 500 has only gone up 240%.
In terms of forward price-to-sales, Amazon is now valued at 2.78, up from 2.25 a year ago. However, it is still by far the cheapest of the Magnificent Seven and in line with the S&P 500.
Amazon’s projected sales and EPS growth rates are much higher than those of the S&P 500. The company’s forward P/E ratio of 33.1 is the third-highest on the list, but it is down from 48.4 a year ago. Amazon’s main retail unit typically shows relatively low profits, as generated cash flow is invested in business expansion. But as you can see below, one of the company’s business units is growing very quickly with a high and improving profit margin.
The value case for Amazon, as outlined by Lemonides, is below.
Earnings season’s silver lining for Amazon
For those fixated on quarterly results and whether or not companies “beat” analysts’ estimates, Amazon’s second quarter was a disappointment, with total revenue coming in below the consensus estimate. Quarterly sales of $147.98 billion were up 10.1% from a year earlier, but they came in below the consensus estimate of $148.67 billion among analysts polled by FactSet. That year-over-year sales growth rate was down from 12.5% in the first quarter.
During the company’s earnings call on Aug. 1, Amazon Chief Executive Andrew Jassy said “customers continue to trade down on price when they can,” but added that “higher-ticket items like computers or electronics or TVs are growing faster for us than what we see elsewhere in the industry, but more slowly than we see in a more robust economy.”
Michael Brush looked into this phenomenon, through which Chinese online retailers are taking some business from U.S. retailers. But he concluded that shareholders of Amazon and Walmart Corp.
WMT0.16% need not worry because both companies offer “a wider variety of products across more price points.”
The bright spot for Amazon continues to be Amazon Web Services (AWS), which contributed $26.3 billion of the company’s second-quarter revenue, with that figure up 19% from a year earlier. Quarterly operating income for AWS was $9.33 billion, up 69% from a year earlier. The cloud-services unit contributed 64% of the Amazon’s consolidated quarterly profit.
And that helps to set up a value breakdown for Amazon.
Amazon’s sum-of-the-parts value case
Lemonides said he recently purchased shares of Amazon, and expressed the price he paid not as a share price, but as the company’s market capitalization on the day of his recent purchase, which was $1.6 trillion.
Amazon is now trading at a significant discount to the value of the company’s major business units, according to Lemonides. Here is the breakdown of his valuation estimate:
- “AWS is sort of the easiest one to appraise and assess because it is generating roughly $100 billion in annual sales and significant profits and cash flow relative to those sales, with close-to-normal profitability,” he said. AWS competes with Microsoft Corp.’s
- MSFT0.30% Azure in the corporate cloud-services space. Based on the $100 billion in annual revenue for AWS and on Microsoft’s stock trading at 11 times (estimated) sales, Lemonides said AWS should be worth at least $1 trillion, which would be about 10 times sales. He added that “AWS is probably better positioned” than Microsoft, “with 19% revenue growth and 15%ish margins.”
- Next, Lemonides placed a value on Amazon’s media business — mainly video streaming for Prime members. “Netflix is similar, in terms of their business profile, revenue and subscriber base,” he said. With Netflix trading at a market cap of about $300 billion, Lemonides believes it is reasonable to assign the same valuation to Amazon’s media business.
- Analysts polled by FactSet estimate Amazon’s revenue over the next four quarters, excluding AWS and subscription services, will total $503 billion. Lemonides assigns a price-to-sales valuation of 2.5 to that total, for an estimated valuation of $1.258 trillion for the retail business.
Combined, his sum-of-the-parts valuation estimate for Amazon is $2.56 billion. Based on FactSet’s market capitalization of $1.89 trillion as of Wednesday’s close, his valuation estimate makes for a current discount of 26%.
And this valuation estimate leaves aside the possibility that analysts’ estimate revisions over the next year or two might provide more support for Amazon’s share price.
