Not more than a day after the new president-elect was chosen, the golden F.A.N.G. or highly valued technology companies (Facebook [FB], Amazon [AMZN], Netflix [NFLX] and Google) were down on average.
Facebook was down 1.93%, Amazon at -3.84%, Netflix -5.95% and Google's parent company Alphabet (GOOG, Financial)(GOOGL, Financial) -2.9%. In comparison, Dow Jones hit a record intraday of 18,873.6 in the same period.
(Trump on Bezos and Amazon, screenshot from GeekWire)
After being engaged in some tough blows and being called out by now President-elect Donald Trump in the months leading to the election, Amazon CEO Jeff Bezos congratulated Trump on his triumph.
(Jeff Bezos on Trump, screenshot from TheVerge)
Amazon reported losses in both fiscal 2012 and fiscal 2014 operations, which may have allowed it not to report taxes. GuruFocus data revealed the company paid a 12% tax rate, on average, for the past five years. Without the 2014 tax rate outlier, Amazon paid a tax rate of 52.76%.
Market performance
Amazon has been widely observed as the future of ecommerce business and has surpassed several traditional brick-and-mortar stalwarts because of its promising business outlook.
In the past five years, Amazon had a total return of 27.7% while the broader Standard & Poor 500 index returned 13.78% (1). Year to date Ă‚ Amazon returned 9.34% while the index provided 7.9%.
Valuations
Amazon had a trailing 12-month price-earnings (P/E) ratio of 169 times (industry median: 21), price-book (P/B) value multiple of 20 times (industry median: 1.6) and price-sales (P/S) ratio of 2.78 times (industry median: 0.7) (2).
The tech company did not provide any dividends or perform any buybacks recently, except for $960 million and $277 million buybacks in fiscal 2012 and fiscal 2011 (1).
Earnings performance
On Oct. 27, the $351 billion ecommerce giant delivered its third quarter and nine months fiscal 2016 results. Three quarters into the year, Amazon delivered 29.5% sales growth to $92.2 billion and a whopping 1,322% profit growth to $1.6 billion. These figures are well above Amazon’s five-year historical growth figures of 25.6% and -12.35% (1).
Amazon’s shares closed up 0.3% the following Monday while the broader market index closed up 0.52%.
“Alexa may be Amazon’s most loved invention yet — literally — with over 250,000 marriage proposals from customers and counting. And she’s just getting better. Because Alexa’s brain is in the cloud, we can easily and continuously add to her capabilities and make her more useful — wait until you see some of the surprises the team is working on now.” – Jeff Bezos, founder and CEO of Amazon.
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Video: Alexa vs. Google Home by Wall Street Journal
Amazon
The ecommerce giant was founded in 1995 and is seeking to be the world’s most customer-centric company, as per filing. The company has three reportable segments: North America, International and Amazon Web Services (AWS).
(Sales per segment, annual and quarterly filings)
North America segment
According to Amazon, its North America segment consists primarily of amounts earned from retail sales of consumer products (including from sellers) and subscriptions through North America-focused websites such as www.amazon.com, www.amazon.ca and www.amazon.com.mx. The segment includes export sales from these websites.
In fiscal 2015, the North America segment contributed 60% to total sales of $107 billion while growing at a 25% pace and delivering a 4.3% operating margin — highest in the past three years.
Nine months into the year, the segment delivered 26.9% sales growth to $53.5 billion and a 2.9% operating margin.
International segment
The International segment consists primarily of amounts earned from retail sales of consumer products (including from sellers) and subscriptions through internationally focused websites such as www.amazon.com.au, www.amazon.com.br, www.amazon.cn, www.amazon.fr, www.amazon.de, www.amazon.in, www.amazon.it, www.amazon.co.jp, www.amazon.nl, www.amazon.es, and www.amazon.co.uk (3).
The segment includes export sales from these internationally focused websites (including export sales from these sites to customers in the U.S., Mexico and Canada) but excludes export sales from Amazon’s North American websites.
In fiscal 2015, the International segment contributed 33% to overall sales while growing 6% and having a -0.3% margin. Observably, the segment contributed less to overall sales in fiscal 2015 compared to 40.2% in fiscal 2013.
Three quarters into this year, the segment grew 27.3% and delivered a -2.7% operating margin.
AWS segment
The AWS segment consists of amounts earned from global sales of compute, storage, database and other AWS service offerings for startups, enterprises, government agencies and academic institutions (3).
The AWS segment contributed 7.4% to overall fiscal 2015 sales while growing an amazing 70% and delivering a 23.6% operating margin — highest among the three segments.
Three quarters into 2016, the AWS segment grew by 58.6% and had a 25.1% operating margin.
Cash, debt and cash flow
Unaudited statements as of Sept. 30 indicated that Amazon had $18.3 billion in cash and $8.2 billion in long-term debt with debt-equity of 0.46. The tech giant also had 5.4% of $70.9 billion assets in goodwill with a book value of $17.8 billion.
Cash flow
(Cash flow, quarterly filing (4))
In a one-year time frame ending in September, Amazon’s cash flow operations demonstrated a remarkable 48.7% growth to $14.6 billion brought by its outstanding profit growth rate. Capital expenditure allocation reached $6.04 billion compared to $4.4 billion last year, leaving the company with $8.56 billion in free cash flow.
Amazon also reduced its debt by $1.2 billion and allocated another $3.58 billion in capital lease obligations.
(Cash flow, annual filing (4))
Nine months into 2016, Amazon allocated $271 million in debt repayments, compared to $1.665 billion last year. Meanwhile, the company allocated $2.9 billion in capital lease obligations.
Conclusion
Amazon demonstrated outstanding and ever-growing business segments. Observably, its AWS business has been growing so fast that the segment can probably overtake the company’s International segment in five or six years' time.
In a recent survey, Amazon Web Services is further believed to grow and maintain its dominance in the cloud service. This is promising as Amazon achieved good margins in the segment in recent years.
(Google Finance)
A month ago, Goldman Sachs (GS, Financial) and Credit Suisse (CS, Financial) ranked Amazon shares as a buy and outperform with a same-price target of $1,050. Using its jagged five-year historical earnings multiple and a five-year growth rate gave me a value of $887 per share.
Neglecting what the traditional valuations indicated (that Amazon is widely overpriced), Amazon would be a speculative buy at a target price of $900 per share.
Notes
(1) Morningstar data.
(2) GuruFocus data.
(3) Annual filing.
(4) Red ink by me.
Disclosure: I do not have shares in Amazon.
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