After sifting through countless small caps and mid-cap stocks to rule them all over the past 20 weeks, the time has finally come to tackle large-cap companies. Large caps will usually not offer the same torrid growth pace that can be found with small caps, but their businesses are often well established globally, with a rich history of profitability. This global presence gives large caps a distinctiveness that small and mid caps usually don’t have -- namely, that many pay a dividend and can essentially run on autopilot in your portfolio.
For reference, here are the previous four choices:
We’re going to back-to-back tech this week, as I’ve chosen to highlight the direct-to-consumer retail pioneer Amazon.com (Nasdaq: AMZN).
What it does
If you had asked me 10 years ago what my opinion of Amazon was, I probably would have cast it off for dead. For those of you wondering, I like to eat my crow with ketchup. In that time Amazon has completely revolutionized the way consumers shop and is now the largest Internet-based direct-to-consumer retail business.
How it stacks up
The first thing that will smack you right in the face if you aren’t prepared for it are the sky-high growth statistics. Over the past 10 years, Amazon has grown revenue at an average of 27%. Keep in mind this figure includes two recessions. Revenue growth is projected to clock in at 42% this year and 32% next year, so it’s not as if the company’s momentum is slowing down, either.
The most common argument against investing in Amazon is that it’s already up more than 2600% over the past 10 years, and worries surround the stock over its already rich valuation relative to its peers. Half of these worries do have merit. Amazon is in no way a deep discount, trading at 93 times 12-month trailing earnings or roughly 30 times cash flow, but there’s no reason its value couldn’t double again considering how rapidly it’s gaining market share and growing its online presence.
Amazon offers consumers an easy way to comparison-shop from the comfort of their homes, which is the reason that traditional brick-and-mortar retailers Sears Holdings (Nasdaq: SHLD), Wal-Mart (NYSE: WMT), and Target (NYSE: TGT) have struggled to grow while Amazon has zoomed ahead. Let’s take a closer look at the figures that make Amazon a compelling buy but at the same time scare quite a few investors away.
|
Company |
Price/Sales |
EPS Growth (3-year average) |
Price/Cash Flow |
|---|---|---|---|
| Amazon.com | 2.4 | 31% | 29.9 |
| eBay (Nasdaq: EBAY) | 3.7 | 75% | 12.2 |
| Barnes & Noble (NYSE: BKS) | 0.1 | NM | 3.1 |
| Overstock.com (Nasdaq: OSTK) | 0.2 | NM | 6.8 |
NM = Not meaningful.
Based on sales, none of these rivals seem overvalued, but Amazon’s glaring 30 times cash flow appears to be a red flag next to Barnes & Noble or Overstock. That’s why I placed that third, very important column in there, which details each company’s earnings growth over the past three years. You’ll notice neither Overstock nor Barnes & Noble grew, yet eBay and Amazon motored higher. Over the long term, Amazon boasts a higher projected growth rate and appears to be taking a sizeable bite out of eBay’s revenue pie.
How it could make you money
I like cash just as much as the next investor and Amazon is ripe with plenty of green. In fact, Amazon’s free cash flow has grown by an average of 39% annually since 2006 while earnings have grown by an average of 29% in that same period. As long as free cash flow remains higher than operating income, it’s a strong possibility that Amazon will be able to expand more rapidly than its peers and may even be able to introduce a dividend in the near future.
Brick-and-mortar retailers are only now discovering that consumers are demanding the convenience of being able to buy online. While these businesses struggle to get their online divisions off the ground, Amazon is well positioned to pull away even further from its peers and to continue to steal away market share. This is one of those cases where a company is so far ahead of the competition, that its own expectations are actually its greatest rival. It’s for that reason that Amazon deserves a spot among the 10 large caps to rule them all.
Would you take a position in Amazon.com here? Share your thoughts in the comments section below and consider adding Amazon.com to your watchlist.
