Amazon.com (NASDAQ: AMZN)
QVI Research Report | Updated Coverage | June 2023
Summary
The inflationary bear market reminded us that Amazon’s topline growth and bottom-line free cash flow are the primary drivers in the house Bezos built.
Fundamentals remain strong, and downside risks are below average.
Nevertheless, shareholder yields and valuation multiples suggest that the stock trades at a premium.
Common sense tells us that shares will likely be trading well above their current price level a decade from now.
However, in this updated research report, QVI maintains its hold rating on Amazon with a caveat for investors holding at a low-cost basis.
Contributing Editor’s Notes: Premium (paying) subscribers can access their Quality Value Investing (QVI) Glossary of Investing Terms and Metric Targets when referencing this research report. Unless noted, all data presented is sourced from Seeking Alpha Premium as of the intraday market on June 7, 2023, and intended for illustration only. If reading this in your email, consider viewing in the Substack App for a more inclusive experience.
AMZN Value Proposition
QVI Research Report's value proposition section provides a brief synopsis of the company's business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company's products or services to its customers compared to the industry, including the stock's historical performance vs. the sector and market.
Amazon (NASDAQ: AMZN) is a non-dividend-paying large-cap stock in the consumer discretionary sector's broadline media industry. AMZN was added to the QVI Concentrated Portfolio on March 7, 2022, at a split-adjusted $137.45 a share.
Amazon.com, Inc. engages in the retail sale of consumer products and subscriptions through online and physical stores in North America and internationally. It operates through three segments: North America, International, and Amazon Web Services [AWS].
The company's products offered through its stores include merchandise and content purchased for resale; and products offered by third-party sellers. It also manufactures and sells electronic devices, including Kindle, Fire tablets, Fire TVs, Rings, Blink, eero, and Echo; and develops and produces media content. In addition, the company offers programs that enable sellers to sell their products in its stores; and programs that allow authors, musicians, filmmakers, Twitch streamers, skill and app developers, and others to publish and sell content.
Further, it provides computing, storage, database, analytics, machine learning, and other services, as well as fulfillment, advertising, and digital content subscriptions. Additionally, the company offers Amazon Prime, a membership program, and Kindle Direct Publishing, the largest book distributor in the world. Amazon serves consumers, sellers, developers, enterprises, content creators, and advertisers.
The company was incorporated in 1994 and is headquartered in Seattle, Washington, USA.
QVI's value proposition elevator pitch for Amazon:
The coronavirus pandemic was an unexpected accelerator to the market dominance Amazon had already established, including the ever-growing reliance of large businesses on AWS, consumers and small businesses on Prime, and authors and book buyers on KDP. Nonetheless, the inflationary bear market reminded us that topline growth and bottom-line free cash flow are the primary drivers in the house Jeff Bezos built.
Performance vs. Sector and Market
The chart below illustrates AMZN's performance against the Consumer Discretionary Select Sector SPDR® Fund ETF (NYSE: XLY) and the SPDR® S&P 500 ETF Trust (NYSE: SPY) since QVI's initial coverage of Amazon in March 2022.
For example, AMZN underperformed its sector and the broader market in total returns during the coverage timeframe.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit Amazon's investor relations webpage and its most recent Form 10-K Annual Report submitted to the U.S. Securities and Exchange Commission or SEC.
QVI's value proposition rating for Amazon: Bullish.
AMZN Total Returns vs. XLY and SPY
Amazon (AMZN) Total Return: -7.89%
Consumer Discret Sel Sect SPDR ETF (XLY) TR: -1.36%
SPDR S&P 500 ETF Trust (SPY) Total Return: +4.11%
Since March 7, 2022 (as of June 7, 2023)AMZN Shareholder Yields
QVI Research Report's shareholder yields section uncovers the equity bond rate of the company's common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-Year Treasury benchmark note.
Earnings and Free Cash Flow Yields
AMZN's earnings yield traded well below the QVI targeted floor at 0.37%, as demonstrated in the below chart. In addition, at -0.69%, AMZN's free cash flow yield traded far under the threshold.
As inverse valuation multiples, the weighted earnings and free cash flow yields suggest that AMZN trades at a high premium. QVI will further explore valuation multiples later in this report.
Dividend Yield
As of this report, Amazon does not pay a dividend.
Average of Shareholder Yields
Quality Value Investing takes the average of the three shareholder yields to measure how the stock compares to the prevailing yield of 3.78% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for AMZN was -0.11% or -389 basis points [bps] below the 10-Year.
QVI's shareholder yields rating for AMZN: Bearish.
AMZN Shareholder Yields
Amazon (AMZN) Price: $121.66
Amazon (AMZN) Earnings Yield: 0.35%
Amazon (AMZN) Free Cash Flow Yield: -0.69%
Amazon (AMZN) Dividend Yield: 0.00%
One-Year Trailing (as of June 7, 2023)Amazon Fundamentals
QVI Research Report's fundamentals section measures the performance strength of the company's senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the chart below, Amazon had positive three-year annualized double-digit revenue growth of 22.37%, far outperforming the 8.81% median growth of the consumer discretionary sector.
Farther down the income statement, Amazon had a trailing three-year mid-single-digit net profit margin of 4.74%, in line with the sector's median net margin of 4.28%.
Returns on Equity and Invested Capital
Amazon's management produced a trailing three-year return on equity or ROE of 23.36%, surpassing the targeted threshold and doubling the sector's median ROE of 10.18%
Stock buyback programs often elevate ROE. For example, in March 2022, Amazon's board of directors authorized $10 billion in stock buybacks while announcing a 20-for-1 stock split.
At 16.68%, Amazon's three-year return on invested capital, or ROIC, was above the QVI threshold and outperformed the sector's median ROIC of 6.10%, indicating that its senior executives are efficient capital allocators.
In addition, Amazon's ROIC exceeded its double-digit weighted average cost of capital, or WACC, of 10.90%. (Source of WACC: GuruFocus).
With double-digit revenue growth, sector-average net profit margin, and robust returns on equity and invested capital, Amazon's management continues its stellar three-decade history of 2nd-level performance in Seattle.
QVI's fundamentals rating for Amazon: Bullish.
AMZN Returns on Management
Amazon (AMZN) Revenue (3 yr Growth): 22.37%
Amazon (AMZN) Profit Margin (3 yr Median): 4.74%
Amazon (AMZN) ROE (3 yr Median): 23.36%
Amazon (AMZN) ROIC (3 yr Median): 16.68%
Three-Year Trailing (as of June 7, 2023)AMZN Valuation, Risks, and Investment Thesis
Next, QVI dives into the valuation multiples, downside risks, and overall investment thesis of Amazon (AMZN), including potential catalysts. So let’s dig further after reading the required disclosures and background information.
Disclosure: I/we have a beneficial long position through direct ownership of common shares of AMZN in our family portfolio. I wrote this report myself, and it expresses my own opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this article.
Additional Disclosure: Quality Value Investing by David J. Waldron’s primary ticker research reports are for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond his family portfolio, which is presented solely for educational purposes. David is an individual investor and author, not an investment adviser. Readers should always engage in their own research or due diligence and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.
About the Writer
David J. Waldron is contributing editor of Quality Value Investing and author of the international-selling book, Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. He received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University.
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