AMZN Stock Study (5-2-23)

Posted by Mark on May 7, 2023 at 07:46 | Last modified: May 2, 2023 17:02

I recently did a stock study on Amazon.com, Inc. (AMZN) with a closing price of $102.05.

Value Line writes:

     > Amazon.com is the largest online retailer. 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-size (> $50B) company has grown sales at an annualized rate of 25.8% over the last 10 years and EPS at an annualized rate of 50.7% from ’18-’21 excluding fractional EPS from ’13-’17 that skew the rate even higher. Also excluded is ’22 when the company lost $0.27/share due to its equity investment in Rivian (RIVN). According to the Seattle Times:

     > During the fourth quarter, Amazon said it faced a pretax
     > valuation loss of $2.3 billion from its investment in
     > RIVN… For the full year [2022], Amazon said it saw a
     > valuation loss of $12.7 billion from its investment in RIVN.
     > That’s compared with a gain of $11.8 billion in 2021.

With negative EPS for ’22, the earnings projections going forward are No Meaningful Figure (NMF) in some cases (e.g. over 100%) and something to screen closely for relevance.

Lines are mostly up and parallel except for EPS decline in ’22. PTPM has trended higher from 0.7% in ’13 to 8.1% in ’21 with a last-5-year average (excluding ’22) of 6.1%. This is slightly lower than the industry and roughly equal to peer averages.

ROE has trended up from 3.0% in ’13 to 27.4% in ’21 with a last-5-year average (excluding ’22) of 24.6%. Debt-to-Capital is slightly lower than peer and industry averages despite increasing from 34.7% in ’13 to 49.0% in ’22 with a last-5-year average of 48.1%. Although Interest Coverage is only 2.3 and the Current Ratio only 0.92, M* and Value Line give Exemplary and A++ ratings for Capital Allocation and Financial Strength, respectively. M* 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 forecast long-term annualized sales growth of 8% based on the following:

• CNN Business projects 8.8% YOY and 10.4% growth per year for ’23 and ’22-’24, respectively (based on 44 analysts).
• YF projects YOY 9.0% and 11.8% for ’23 and ’24, respectively (45 analysts).
• Zacks projects YOY 8.9% and 12.6% for ’22 and ’23, respectively (14).
• Value Line projects 13.1% growth per year from ’22-’27.
• CFRA projects 8.5% YOY and 9.2% per year for ’23 and ’22-’24, respectively.
• M* provides a 2-year annualized ACE of 9.7% while projecting 10.0% for the next five years in its analyst note.

I am forecasting conservatively below the long-term estimates.

I forecast long-term annualized EPS growth of 61% based on the following:

• CNN Business projects 5-year annualized growth of 22.0% (based on 44 analysts).
• MarketWatch projects growth of 43.2% YOY and 53.6% per year for ’24 and ’23-’25, respectively (53 analysts; I avoided the negative ’22 but could not avoid a still-depressed ’23).
• Nasdaq.com projects 51.5% per year and 48.5% YOY for ’24 and ’23-’25 (14, 13, and 9 analysts for ’23, ’24, and ’25).
• Seeking Alpha projects 4-year annualized growth of 36.7%, which I have to regard as NMF (probably due to the negative ’22 value).
• YF projects YOY growth of 674% and 65.8% for ’23 and ’24, respectively (45), which I regard as NMF.
• Zacks projects YOY growth of 114% and 54.3% for ’23 and ’24, respectively (both NMF), along with a 5-year annualized estimate of 18.4% (13).
• Value Line projects annualized growth of 15.2% from ’21-’27 (and 38.5% from ’22-’27, which I regard as NMF).
• CFRA reports EPS of $3.24/share and d$0.27 for ’21 and ’22, respectively—neither of which equals the sum of the four quarters shown in its earnings table. I regard its ’23 YOY and ’22-’24 projections as NMF, accordingly.
• M* gives a long-term estimate of 27.7% to get a final value of $0.92/share in five years. As a complete disconnect relative to other projections, I regard this as NMF.

When the smoke clears and the dust settles, I have three long-term estimates averaging 18.5%. I am forecasting conservatively below the range at 12%.

I also must decide what initial value to use for the EPS projection. Rather than $3.24 in ’21 (or negative ’22, which is NMF), I will use the ’20 EPS of $2.09. $2.09/share * (1.12 ^ 7) = $4.62/share. The closest I can do is project from the last quarterly point ($0.42/share) to get $4.54/share using a 61% growth rate.

My Forecast High P/E is 35. Since 2016, high P/E has eased from 173 to 58.2 (2021) with a last-5-year average of 83.3. At some point, I expect P/E to fall into a “normal” range, but exactly when is unknown.

My Forecast Low P/E is 25. Since 2016, low P/E has eased from 96.7 to 44.4 (2021) with a last 5-year average of 51.2. Again, exactly when this will fall into a “normal” range is unknown.

To determine Low Stock Price Forecast (LSPF), I will assume zero growth from the initial value determined above. That would be the $2.09/share followed by 12% growth for ’21 and ’22 resulting in a low EPS of $2.62/share and LSPF of $65.50. This is 35.8% less than the previous closing price and 19.5% less than the 52-week low.

These inputs land AMZN in the HOLD zone with an U/D ratio of 1.6. The Total Annualized Return (TAR) is 9.3%.

PAR (using Forecast Average—not High—P/E) is lower than desired at 6.0%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 857 studies done in the past 90 days (266 outliers and my study excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 12.0%, 18.0%, 63.3, and 51.2. I am lower across the board. Value Line projects a future average annual P/E of 39.5, which is lower than MS (57.3) and higher than mine (30.0).

It’s quite apparent the MS community is confused about how to approach this company [I have struggled as well!]. Mean projected annualized EPS growth is 88.6%. 96 studies have EPS growth rates between 300-821% and the standard deviation is over 175%, which overwhelms the new outlier screening functionality. Thankfully mean and median are both reported thereby allowing me to choose the lesser value for a more conservative comparison.

With regard to other data, MS high and low EPS are $2.51/share (mean $4.51 with SD $5,238) and $1.09/share (mean $2.88 with SD $7.62) compared to my $4.54 and $2.62. I would argue both MS high and MS low EPS values to be unreasonably low [and at least partially offset by the high MS P/E range]. My high EPS is in the ballpark with the Value Line estimate (~10% lower). The MS LSPF of $78.90 is 20.5% greater than mine. I won’t try to calculate a default or implied Forecast Low P/E due to the widespread distribution.

I come away feeling MOS to be robust in the current study. I would look to re-evaluate the stock under $88/share.