AMZN Stock Study (2-1-23)

I recently* did a stock study on Amazon.com Inc. (AMZN) with a closing price of $103.13.

Value Line writes:

     > Amazon.com is the largest online retailers [sic]. The company opened
     > its virtual doors in 1995. Sales breakdown (2021): North America;
     > 59% of sales. International sales, 27% of total. Amazon Web Services
     > (AWS), 14%. Third-party sellers (Marketplace) account for about 20%
     > of sales. Seasonality: Q4 accounted for 29% of ’21 revenue.
     > Acquired Audible.com, ’08, Zappos, ’09, Whole Foods Market, ’17.

This mega-sized (> $50B annual revenue) company has grown sales at an annualized rate of 26.1% over the last 10 years and EPS 71.1% per year since 2016 (excluding previous years with tiny EPS that skew the historical average even higher). Lines are mostly up and parallel except for EPS decline in ’22. PTPM has trended higher over the last 10 years from ~1% to ~8% with a last-5-year average of 5.3%. This slightly trails peer (stated as VIPS, JDD, and PDD) and industry averages.

ROE has trended up from ~0% to ~27% over the last 10 years with a last-5-year average of 22.1%. Debt-to-Capital has increased from 31.9% to 45.7% with a last-5-year average of 49.8%. This is lower than peer and industry averages. Although Interest Coverage is only 5.6 and the Quick Ratio only 0.68, the M* analyst writes:

     > The balance sheet is sound with a net cash position and only modest
     > gross debt. We expect the balance sheet to remain sound as the
     > company has typically maintained a conservative balance sheet and
     > generates more than enough FCF from [Amazon Web Services] and
     > advertising to fund growth throughout the business.

I assume long-term annualized sales growth of 8% based on the following:

• YF projects YOY 8.6% and 9.6% growth for ’22 and ’23, respectively (based on 46 analysts).
• Zacks projects YOY 8.6% and 9.1% growth for ’22 and ’23, respectively (13).
• Value Line projects 17.8% growth per year from ’21-’26.
• CFRA projects 13.3% YOY and 10.8% per year for ’22 and ’21-’23, respectively.
• M* provides a 2-year estimate of 8.6%.

I assume long-term annualized EPS growth of 9% based on the following:

• CNN Business projects 5-year annualized growth of 12.2%.
• MarketWatch projects annualized ACE of -8.1% and 11.6% for ’21-’23 and ’21-’24, respectively (based on 54 analysts).
• Nasdaq.com projects 65.8% YOY and 66.9% per year for ’24 and ’23-’25, respectively (12, 8, and 4 analysts).
• YF projects YOY growth of -103.7% and 1433% as negative ’22 earnings rebound in ’23 off a fractional base (46).
• YF also gives a 5-year annualized estimate of 26%.
• Zacks similarly projects YOY growth of -104.3% and 1228% as earnings turn negative in ’22 then rebound in ’23 (11).
• Zacks gives a 5-year annualized estimate of 18%.
• Value Line projects annualized growth of 21.2% from ’21-’26.
• CFRA projects -103.7% YOY and -24.6% per year for ’22 and ’21-’23, respectively.
• M* gives a long-term growth estimate of 8.9%.

I’m forecasting near the bottom of the long-term-estimate range (8.9% – 26%). Because a rebound is forecast following a sharp [quarterly] EPS drop in ’22, I decided to override projection from the last annual (vs. quarterly) data point.

My Forecast High P/E is 35. Since 2016, high P/E has eased from 173 to 58.2 (2021). The last 5-year average is 106.1. At some point, I expect P/E to fall into a “normal” range, but predicting when this happens is like taking a shot in the dark.

My Forecast Low P/E is 25. Since 2016, low P/E has eased from 97 to ~44 (2021) with a last 5-year average of 65.3. I expect this to fall into a “normal” range eventually (I’m astounded that this hasn’t happened already to the mega-sized company).

My Low Stock Price Forecast is $81. The default low price is $27.30 based on the depressed $1.09 EPS. This does not seem reasonable. Instead, I will use the 2020 low price of $81.30, which is 21% below the last closing price.

All this results in an U/D ratio of 3.2. This makes AMZN a BUY with a Total Annualized Return (TAR) of 11.1%.

AMZN’s 17% ownership stake in RIVN is what makes this analysis so complex. AMZN lost $10.4B over the first nine months of 2022 due to the drop in RIVN stock price. This is why analysts forecast -100% EPS growth for 2022 and why some 2023 [provided that RIVN shares do not continue the precipitous decline] growth projections are over 1000%. In my view, any math amounting to a 20%+ long-term (e.g. 3-5) EPS growth rate after years 1-2 are negative is suspect.

While TAR is decent, PAR (using forecast average, not high, P/E) is only 7.7%. Is it reasonable to expect the former, which is consistent with the highest long-term analyst estimates?

To answer this, I assess margin of safety (MOS) by comparing my inputs with Member Sentiment (MS). Out of 1142 studies over the past 90 days, projected sales, projected EPS, high P/E, and low P/E average 13.9%, 17%, 78.6, and 67, respectively. I am dramatically lower on all inputs.

To calculate average MS Low Stock Price Forecast, I excluded 199 studies using $100 or more. At least half of these were four digits, and I deem all them to be unreasonable and/or invalid. The revised averages are 13.1%, 16.4%, 73.6, and 61.5, respectively: still well higher than mine. The average Low Stock Price Forecast is $70.50, which is lower than mine and would have resulted in a HOLD for this study rather than BUY. I’m not sure how meaningful this is as I would similarly have had a lower Low Stock Price Forecast had I chosen to use the 2020 low—a decision one could argue to be unreasonable.

While my aim is to use MS to evaluate MOS, I wonder if such comparison here might be apples-to-oranges because I don’t know how many changed projection from the last quarterly (default) to annual data point. Nevertheless, both my growth rate and P/E projections are lower than MS. Even if the conservativism of one set effectively offsets the [more aggressive decision to] override from quarterly to annual data point, I still have the other conservative set providing MOS.

And Value Line has a projected average annual P/E of 40 compared to my 30, which further bolters the conservative case.

Despite the lackluster PAR, given the apparent MOS I like a BUY on these shares up to $104.

*—Publishing in arrears as I’ve been doing one daily stock study while only posting two blogs per week.