Are you looking to invest in companies with exceptional management, solid financials and exciting growth prospects?
1 – A VISIONARY FOUNDER
The most important aspect of any company is the leadership. Is management passionate about the business? Are they innovative and ahead of their time? Do they strive to be the best?
When it comes to Amazon founder Jeff Bezos, the answer to all of these questions is yes.
Bezos founded Amazon in the early 1990s when the internet was still in its infancy. The story goes that Bezos decided to quit his high paying job in IT to open an online bookstore upon reading that the internet was growing at a monthly rate of 2,300%. Within 30 days, the newly found company was generating weekly sales of $20,000.
He took advantage of the status quo to get ahead of his competition. In the late 1990s, he and his team created a 1-Click ordering process that was controversially awarded a patent. He immediately filed a lawsuit against Barns & Noble, his main competitors who has previously tried to buy him out, for patent infringement and won a preliminary hearing, forcing them to add an extra step to their checkout process. He didn’t care about being controversial, he simply wanted to come out on top.
Bezos developed Amazon’s economic moat by implementing a network effect, which states that the value of a product or service increases according to the number of others using it. He partnered with hundreds of retailers to broaden the scope of his business. He created Amazon Prime, a loyalty program which proved to be a significant success and, over the next decade, allowed him to enter Italy, France Germany, the UK, Canada, and Japan. Today, there an estimated 112 million Amazon Prime members,.
He thinks outside the box and innovates to revolutionize people’s habits. From the Amazon Kindle to drones delivering your packages, Bezos is obsessed with innovation and revolutionizing people’s habits and rapport to technology. He also created Amazon Science, which conducts fundamental research in robotics, Artificial Intelligence, cloud computing, and economics, among other fields.
In the early stages, he sacrificed short term profitability to invest in long-term growth. “To be profitable now would be a bad decision“, he told PC Week in 1998, as “This is a critical formative time if you believe in investing in the future“. He invested millions of dollars to diversify Amazon’s areas of expertise, which culminated in the 2006 launch of Amazon Web Services, a global compute, storage, database, analytics, application, and deployment services provider. He foresaw the cloud computing revolution and quickly became a leader in this field. Today, Amazon controls 33% of the cloud computing market, ahead of industry behemoths Google, Oracle and Microsoft.
Bezos has all the qualities required to lead such a tentacular empire. He is known for his double-personality which can immediately transform his kindness into ruthless executive power, instilling fear and respect in his employees. Hyper-intelligent and very driven, he expects his subordinates and associates to be as dynamic and motivated as he is. John Rossman, a former Amazon executive, claims that Bezos is “striving to achieve operational excellence and always striving to raise the bar at every turn“.
He obsessed with delivering great customer service. Apparently, such is Bezos’ commitment to customer service that he reads customer feedback and expects his team to solve issues as fast as possible. He has implemented a system which ranks the severity of internal emergencies with the highest being the infamous “Sev-B“: Bezos considers the emergency so important that he personally sends an email to the person responsible and expects a full report within the next few hours. This hands on approach allows him to stay in touch with the customer’s true experience and quickly fix faults.
Bezos cultivates an entrepreneurial mindset among his workers and hates bureaucracy. He promotes a sense of urgency in the business and is constantly speeding up internal processes. He fosters efficiency and scalability through the “two-pizza rule” which mandates that individual teams shouldn’t be bigger than what two pizzas can feed. Bezos claims this enhances communication among team members, gives them full ownership of the project, aligns incentives and, ultimately, increases accountability. Apparently, most of Amazon’s defining features have been developed by two-pizza teams.
Lastly, it appears that Bezos’ ambitions go beyond well beyond Amazon. Like many entrepreneurial legends, he appears to be motivated by the possibility of cementing his place in the history books. In 2004, he founded Blue Origin, an aerospace company aimed at developing spaceflight technology whose goal is to establish “an enduring human presence in outer space“. The company has successfully sent a rocket to suborbital space and landed it onto a landing pad after takeoff.
2 – THE CORONAVIRUS: ACCELERATING THE SHIFT FROM RETAIL TO E-COM
Moving on to the business aspect, Amazon is one rare companies actually benefiting from the coronavirus crisis.
At the start of the crisis, Amazon’s share price followed the overall market and dropped 22.7%, going from $2170 a share on Feb 19th to a $1676 a share on March 12th. However, this proved to be an extremely short lived drop as the share price recovered as early as March 16th to not only recover all of its losses but also reach new all time highs above $2400. The stock has since dipped slightly and closed at $2375 on April 17th, 2020.
Why is Amazon’s share price surging to new highs during the crisis?
Consider this: A recent article published in The Guardian claims that Amazon customers are spending approximately 11 thousand dollars a second on its website, which works out to roughly $950 million a day.
This is mind boggling but also completely understandable: Virtually all “non-essential” stores in the Western world are closed so customers who are stuck at home are going on online shopping sprees. Since Amazon controls almost 40% of all e-commerce in the USA and 10% worldwide, it is only natural that it benefits from the confinement and lock-downs.
The question now is will Amazon’s sales decrease after the crisis is finished and retail stores reopen?
This is possible, but unlikely.
First of all, studies have shown that Amazon customers are very loyal. A 2019 Amazon Consumer Behavior Report from Feedvisor revealed “nine in 10 (89%) of more than 2,000 surveyed U.S. consumers, and nearly all surveyed current Prime members (96%) are more likely to buy products from Amazon than other e-commerce sites” and that “Two-thirds of respondents (66%) typically start their search for new products on Amazon, and nearly all (95%) are satisfied with Amazon search results. When consumers are ready to buy a specific product, nearly three-fourths (74%) go to Amazon to do so“.
Second, Amazon Prime membership is increasing. As of December 2019, approximately 112 million Americans were Prime members, up 6.6% from June 2019. Considering the sheer volume of sales currently being processed, we can assume that this figure will continue increasing. On average, Prime members spend $1,400 per year compared to $600 per year for non Prime members. More Prime members means more sales and less customers for the competition.
3 – SPECTACULAR GROWTH
Amazon’s growth is simply spectacular: Revenues, Net Income and EBITDA are all increasing year over year without any dips.
The company’s financials are growing at a dizzying rate:
- 2016-2019 Revenues are up 106.2%:
$280.5 billion in 2019 compared to $135.9 billion in 2016.
- 2016-2019 Net Income is up 388.7%:
$11.5 billion in 2019 compared to $2.3 billion in 2016.
- 2016-2019 EBITDA is up 199% from 2016:
$37.3 billion in 2019 compared to $12.4 billion in 2016.
Bezos’ obsession with innovation is immediately visible: Over the last 4 years, the company has more than doubled its Research & Development (R&D) spending: In 2019, it invested $35.9 billion in R&D, up 123.38% from 2016 when R&D spending was $16 billion. Amazon is more than just a retailer, it’s also a tech company, and as such it recognizes the importance of investing to continue innovating and improving their services.
Lastly, Amazon’s 2016-2019 Selling General and Administrative costs (SG&A) increased 149%. This is understandable given the company’s growth rate but still represents 8.5% of revenues compared to 7.1% in 2016. However, this is offset by an increase in 2016-2019 Net Profitability: In 2019, Net Income represents 4.1% of revenues compared to 1.7% in 2016.
4 – LOW DEBT
Amazon’s Total Assets have almost tripled in 3 years: 2019 Total Assets of $225.24 billion are up 170% from $83.4 billion in 2016.
The company has a Current Ratio of 1.09, which is not exceptional (Buffet for example likes it when the Current Ratio is 1.5 or higher) but it still means that the company has no short term liquidity problems.
As of December 2019, Amazon has $73.3 billion of long-term liabilities. This includes such items as long term loans and advances, long term lease obligations, deferred revenue, bonds payable and other Non-Current Liabilities due in more than 1 year.
Total Liabilities have increased at a slower rate than Total Assets. While Total Asset increased 170% from 2016-2019, Total Liabilities increased by 154% over the same period. Keep in mind that not all debt is bad debt as the low interest rates environment often justifies taking out cheap credit to finance growth.
How do we know if Amazon can sustain its debt burden?
We can figure this out by looking at the company’s cash and equity. As we have seen, Amazon’s earnings are increasing rapidly and its 2019 EBITDA is a whopping $37.3 billion. The company’s yearly earnings cover half of its long term debts. Even better, the company’s total stockholder equity of $62 billion covers roughly 85% of the entire non-current liabilities. This means that Amazon could pay off its entire long term obligations if it wanted to.
Thus, the company’s liabilities are well covered.
5 – MASSIVE CASH FLOW
The last important metric to analyze is the company’s Free Cash Flow. This is very important because it provides an indication of the company’s ability to finance its growth with its own capital. If a company wants to invest but doesn’t have cash at its disposal, then it will have to dip into the lending markets. Although this is not a huge problem in the context of zero interest rates, it still loads up the balance sheet with debt that could theoretically pose an issue if the company’s cash flow ever dries up.
Again, this is not a problem for Amazon. As you can see, its 2019 Free Cash Flow of $21.6 billion is simply staggering.
Further, this figure is is increasing every year: It increased 25% from 2018-2019 and 166% from 2017-2018. It decreased slightly from 2016-2017 but this is not worrying due to subsequent yearly increases. Sometimes, free cash flow can decrease slightly if the company is investing or paying off its debt.
Amazon’s debt is well covered by the EBITDA and Free Cash Flow which are both increasing extremely quickly in recent years.
But can Amazon sustain its growth?
I believe it can.
6 – AN EXCITING FUTURE
Consider this article which lists 5 reasons why Amazon will continue growing in the near future:
– First, Amazon has yet to fully penetrate the Indian market: The company holds a 1.6% share of the Indian e-commerce market, compared to 15% in China and 14% globally. Since the India’s e-commerce market is “set to grow at a CAGR of 30% for gross merchandise value to be worth $200bn by 2026“, Amazon is very optimistic about its chances of increasing its market share.
– Second, e-pharmacy may be Amazon’s next big growth sector. Amazon recently acquired online pharmacy PillPack for $750 million. With the e-pharmacy market estimated to reach close to $180 billion in 2026 (compared to less than $50 billion in 2018), it is very likely that Amazon will become a strong player in this space.
– Third, continued growth of Amazon Prime subscriptions. Prime already counts 150 million paid members and CEO Jeff Bezos recently emphasized that membership is still increasing. It is estimated that more than 50% of households in the US are Prime members and the company hopes to keep improving on these numbers. Knowing Bezos’ ambition, he will want to reach as close to 100% as possible.
– Fourth, growth of Amazon Web Services cloud computing, which is the industry leader. Amazon owns 33% of the worldwide cloud computing market and expects to add to that by staying ahead of Microsoft and Google. Some of its clients include such corporate behemoths as Goldman Sachs, Coca-Cola, Johnson&Johnson, Siemens, Shell, Novartis, and many others.
– Fifth, maintaining an innovative spirit: Amazon claims that “scientific innovation is essential to being the most customer-centric company in the world” and appears to be living up to that ethos. Amazon Science conducts fundamental research in numerous domains that will revolutionize our future. It has set up numerous labs, including one in the British University of Cambridge. Amazon Sciences is already a leader in the field of research as it receives thousands of patents per year. Further, growth rate in received patents is astonishing: In 2010, it received just 121 patents; in 2019, it received 2,396 patents (1880% increase in just 9 years). To give you an idea of their accomplishments, in 2019 Amazon received a patent for its home drone surveillance system.
7 – STELLAR STOCK PERFORMANCE
Over the past 10 years, Amazon’s stock price increased spectacularly: On April 16th, 2010, Amazon’s stock price was $142.17; on April 18th, 2020, the stock price was $2375.
If you were lucky enough to believe in Amazon 10 years ago, your investment would have made you a total return of 1570.5%, which represents an average annual return of 157%.
Obviously, there is no guarantee that future returns will be as impressive as past returns. However, given the fact that Amazon still has plenty of room to grow, there is a strong possibility of further capital gains.
In sum, there are many reasons why Amazon is a good investment:
- Jeff Bezos loves the company, is forward-thinking, innovative and obsessed with delivering outstanding customer service
- Amazon is benefiting greatly from the coronavirus crisis
- Amazon’s revenues, net income and EBITDA are growing rapidly
- Amazon’s debt burden is well managed and sustainable
- Amazon generates massive cash flow
- Amazon invests billions in research and development to continue innovating and revolutiozing technology
- The company has considerable room to grow in the coming years
The only discernible negative aspect of investing in Amazon is the lack of dividend. Unfortunately for income investors, Bezos see no immediate need to pay out dividends as he prefers to reinvest his cash back into the company. Thus, shareholders will have to be patient.
VERDICT: STRONG BUY. At nearly $2400 a share, Amazon stock is incredibly expensive but I highly recommend you add it to your long term portfolio if you can afford it. However, the current P/E ratio of 103 indicates that it may be slightly overvalued. If you believe that is the case, you should spread out your purchase over the next few weeks/months to cost average your entry and take advantage of any dips.
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DISCLAIMER: This article is the fruit of my personal research and should not be considered financial advice. I enjoy analyzing stocks and providing investment ideas but I highly encourage you to conduct your own research before investing in any asset. NEVER invest without having done proper due diligence and NEVER invest out of the Fear Of Missing Out (FOMO). Also, NEVER invest because some internet message boards are hyping up a high-flying stock. As a rule of thumb, the number of rockets included in a tweet are inversely proportional to the quality of the advice given.