Amazon has long been described as a growth stock. Recently, however, its growth slowed down, mainly in its main electronic commerce business.
Amazon executives have implied the sowdown of growth in the e-commerce business should be disregarded. Should it?
Amazon Web Services(AWS), the cloud computing business of Amazon is growing strongly with around 25.7 bln. USD yearly revenue run rate. The electronic commerce business exhibited a marked growth slowdown. I think this is logical. It is unlikely that all commerce would become internet commerce. Going into a store, checking out things in a physical way and being advised by staff has its value. Shopping for groceries is hardly ever going to go online. Amazon is quickly becoming the number three player in internet advertising breaking up Google and Facebook's duopoly in internet advertising.
Amazon, however, still exhibits very low margins - 4% and this is even considered high by historical standards. Amazon is trading at a trailing Price/Earnings ratio of 78. In my opinion, this is too high even measured by the recent growth of Amazon. Now, that Amazon's revenue is not growing so fast this is stratospheric. Amazon should be trading at a Price/Earnings Ratio of 40, which would imply Amazon's intrinsic worth is around 400 bln. USD or half its current market capitalization of 780 bln. USD.
Why is Amazon's intrinsic worth half its current market capitalization? Because, in short, its revenue growth slowed down from 40% to 20% on a year on year quarterly basis. This means the path to a reasonable net profit margin of let's say 10% gets extended indefintely. Amazon does not distribute dividends. Wall street equity research analysts have long said that with the growth the net profit margin will improve and Amazon will start distributing dividends and shareholders will benefit. But that has not happened for a decade now.
When will Amazon reach its intrinsic worth, which is around 800 USD, or half its current stock price of 1588.22 USD. When the next economic downturn comes, which I forecast will be in 2021, Amazon market capitalization will be cut in half to around to 400 bln. USD from its current 780.14 billion market capitalization.
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Conflicts of interest: I may possess some of the securities,currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!
Kind regards,
Petar Posledovich
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