Why Amazon Will Still Be a Buy at $400

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Amazon (NASDAQ: AMZN  ) trades at a multiple that many consider pricy. Amazon's trailing P/E ratio is an incredible 1,406, and a the forward P/E of 145 is very high. Yet, Amazon keeps thriving. But, with shares fast approaching $400, the debate regarding the company's valuation has increased. Will Amazon still be a buy at $400?

It's about long-term prospects
Amazon has created a cloud server farm, established its Kindle, and entered into the grocery business. Although Amazon may be an e-commerce veteran, it is a start-up in the cloud server business, grocery market, and online streaming segments. Amazon is investing in new markets that show growth potential. As Amazon consolidates its position in new businesses, profitability will improve. Even when Amazon hits $400, the valuation suggests further upside is ahead.

The retail angle
Amazon is not just the largest e-commerce company in the U.S., it is also one of the most solid. Amazon saw same-stores sales rise 48.5%, outpacing the overall industry. Additionally, Amazon is investing in expanding its infrastructure and creating new segments. Jefferies Equity Research said Amazon grew roughly two times faster than overall e-commerce and seven times faster than overall retail. In other words, Amazon is growing many times faster than companies such as Wal-Mart.

Amazon's Web Services
Amazon operates a segment called Amazon Web Services, or AWS, which is the company's cloud infrastructure and cloud app platform business. Evercore predicts AWS's annual sales in 2013 will be $3.5 billion and account for 13% of Amazon's business in the next two years. Bernstein Research recently issued a report predicting AWS will have an estimated $20 billion in revenue by 2020.

The bottom line is that Amazon is innovative, and competing companies could lose market share. (NYSE: CRM  ) is a significant player in the cloud app platform business. Its Heroku program has the market-best 18% share of the cloud app space. Amazon has a 17% share and is expanding at a faster rate. While cloud app development is a small part of Amazon, Heroku is a significant piece of Amazon's pricing strategy might see it stealing additional market share in the app space.

IBM (NYSE: IBM  ) acquired SoftLayer to knock Amazon off its lofty perch. IBM hoped SoftLayer would be the centerpiece of a new print, online, and outdoor advertising campaign to change the perception that AWS is the cloud sector's most important player. Synergy Research Group said Amazon accounts for more than $700 million of Platform and Infrastructure-as-a-Service revenue, which is nearly $100 million more than, Microsoft, IBM, and Google combined. This suggests that the IBM acquisition did not slow down Amazon's disruptive growth.

Bottom line
While it's been argued that Amazon provides a good shorting opportunity, the simple fact is Amazon is investing for the future. Additionally, it just might be one of the most disruptive companies in history because it has a strategy of selling goods at breakeven prices. Amazon might hit $400, but the valuation still suggests further upside.

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Read/Post Comments (2) | Recommend This Article (2)

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  • Report this Comment On December 19, 2013, at 9:19 AM, pondee619 wrote:

    " it has a strategy of selling goods at breakeven prices."

    Doesn't Amazon have to make a profit sometime? I had a small business/hobby. The things I made would sell at "break even" prices. Sure, it was fun for a while, but with no profit, nothing for me, it got old and tired. Isn't that goingto happen to Amazon should they not show earnings soon?

    "and a the forward P/E of 145"

    "Amazon saw same-stores sales rise 48.5%".

    Anyone can grow "sales", just cut your prices without regard to a profit margin.

    "As Amazon consolidates its position in new businesses, profitability will improve"

    When and how?

    Is the long term plan to corner all consumer retail sales and THEN gouge the consumer? Opening the door to new (as yet unknown) competition.

    Or is the plan to continue "selling goods at breakeven prices" forever? If so, why should I be an owner?

  • Report this Comment On December 19, 2013, at 8:51 PM, duuude1 wrote:

    Not sure where anyone gets the idea that AMZN sells at breakeven. If you look at the income statement for Q3 '13 you see total rev of $17.1B and cost of rev of $12.4B for a gross profit of $4.7B (27.5%). That's not breakeven.

    For comparison sake, WMT's total rev was $115.5B and cost of rev was $86.6B for gross profit of $28.8B (24.9%). AMZN is doing better than WMT using that crude measure.

    AMZN's OpEx is $4.8B, so whoosh, no profits. BUT - where are they spending those profits? Look at the cash flow statement and you'll see $3.8B in CapEx. Warehouses, robots, massive server farms... infrastructure to re-tool the retain universe. Like a smart business exec, Bezos is investing in the future of the company - not just taking out profits to buy a superyacht. Well, maybe a newspaper or a rocket...

    AMZN does not sell at breakeven. They reinvest.


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