In investing, there are no points for originality, so it often pays to follow the smartest investors out there.
Bill Miller, the chairman and chief investment officer of Miller Value Partners, a $1.9 billion fund, may be best known for his time as the chief investment officer of Legg Mason when his portfolio beat the market every year from 1991 to 2005.
Miller was an early investor in Amazon (AMZN 3.65%), and he's pitching the stock once again, saying on a recent episode of CNBC's Closing Bell that he thinks the stock is attractive at the current price.
Miller said the stock was due for a recovery and called it "one of the easiest names in the market right now." The value investor touted strong growth at Amazon Web Services (AWS), the cloud computing division, saying he expected it to grow revenue by 25% over the next three years. From an estimated $80 billion in revenue in 2022, that would give AWS $156 billion in revenue, and at an estimated 30% operating margin, it would have an operating income of $47 billion.
According to Miller, AWS' value alone basically justifies Amazon's current market cap, meaning investors get its other businesses like e-commerce and logistics for free. He also credited CEO Andy Jassy's management and forecast a sharp acceleration in free cash flow, predicting the company would reach $60 billion in free cash flow by 2025.
The assumption there seems to be that the company's expansion of its warehouses and data centers will slow, and with $47 billion in operating income coming from AWS, it won't take too much from its other businesses to round out the rest of the $60 billion.
Based on the company's market cap of $916 billion, that would mean it trades at just over 15 times 2025 free cash flow, a low price for one of the market's favorite growth stocks.
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Is Miller right about Amazon stock?
Considering Amazon's current financial results, it may seem hard to imagine the company producing $60 billion in free cash flow after it forecast just 2% to 8% in the fourth quarter and reported negative free cash flow of $19.7 over the last four quarters.
The company has also warned of macroheadwinds in both AWS and its e-commerce business. Both its recent results and its Q4 guidance show the challenges Amazon is facing.
However, if things go right for Amazon in both the overall economy and its own execution, it's easy to see how the stock can make a turnaround. AWS continues to be a juggernaut, posting 27% in its most recent quarter, and it's not unreasonable to expect it to grow 25% annually over the next three years, especially as cloud infrastructure has become a multitrillion-dollar market.
Meanwhile, the company is cutting costs on multiple fronts, laying off 18,000 corporate employees, closing or canceling dozens of warehouses, shuttering unprofitable start-up businesses like Amazon Care, and freezing hiring.
Those moves should help it deliver meaningful margin improvement as the business outside of AWS looks like it has a lot of fat to trim. In its other two segments, the company has lost more than $8 billion through the first three quarters of 2022, and it may take more than cost-cutting to get its e-commerce business back on track. Amazon will also need to find a way to reaccelerate revenue growth, which will be tough in a recession, especially for a company whose revenue is set to top $500 billion in 2022.
Miller's prediction of $60 billion in free cash flow in 2025 seems like a best-case scenario for Amazon, but he's right about the recovery. The stock looks oversold, down 50% from its peak in 2021, and it won't take much for it to recoup those losses once market sentiment starts to shift.
Although the company does face challenges, the upside potential with Amazon greatly outweighs the downside risks.
