(Khalid Nazir and Ananya Kumar)
Amazon.com, Inc. is an American multinational technology company based in Seattle, Washington. Amazon focuses on e-commerce, cloud computing, digital streaming, and artificial intelligence. Amazon is known for its disruption of well-established industries through technological innovation and mass scale. It is the world’s largest online marketplace, AI assistant provider, live-streaming platform and cloud computing platform as measured by revenue and market capitalization. Amazon is the largest Internet company by revenue in the world. It is the second largest private employer in the United States and one of the world’s most valuable companies.
|Price/Free Cash Flow||46.823||40.985||54.73||70.26||37.415||52.38|
|Earnings Yield %||32.86||31.19||43.43||28.54||26.68||44.13|
|Enterprise Value (Bil)||317||355||561||774||933||1,649|
Amazon is trading at $3,284.72 as of the close on the 21st August 2020 having recovered from the COVID-19 market crash in March where the stock price was trading at a low of $1,676.6. But even so most of Amazon’s stock price gains have happened after it began to recover from the crisis. Amazon was trading at $2,134.87 on the 9th of February which at the time was at its all-time high but since the market crash, Amazon has seen its share price increase substantially. This has led to their market cap now reaching a staggering $1.65 trillion.
This has meant that the lead indicators of Amazon’s stock performance have been hugely impressive over the last few months. Price/Sales has increased quite significantly in recent months to 5.18 from the steady value of 2 to 3, as result of the recent rally in the share price over the past few months. Price/Earnings has fluctuated through the years, but has seen a recent increase, currently standing 126.77 signalling a rising share value.
The Debt/Equity ratio is a key indicator of Amazon’s financial health, by assessing through how much of the company’s growth is built upon debt. The most recent D/E value of 47.5% is considered high by the industry standard. However, the D/E value has been decreasing over the past few years from a value of 80.7% only 5 years ago. However, Amazon has begun to leverage on more debt, but Amazon’s equity has seen a rise as well, and as a result the debt/equity value has crept up slightly. Amazon also has a solid financial foundation with little risk of running into trouble in covering their debt. Amazon’s short-term assets are able to cover ($110.9 billion) and are able to cover its short-term liabilities ($93.3 billion) as well as its long-term liabilities ($90.7 billion).
Again, due to the recent rise of Amazon’s share price in recent months, Amazon Enterprise Value/EBITDA looks positive too. It has currently seen an increase in 2020, compared to the past 3 years where it had declined between 2017 and 2019, which may mean that Amazon at this stage could be overvalued and so may not be the best stock to invest in currently. However, this increase in the ratio could be because of the increase in the share price and so the increase in the ratio may be justifiable. Positive earnings growth is also reflected in Amazon’s earnings yield, which currently stands at a reasonably healthy 44.13%.
Recommendation – Hold
Amazon has seen a substantial increase in its share price over the past few months after the COVID-19 market crash seen in May. It has risen to all-time highs, helped by the fact that it is a dominant player in two industries; that being the e-commerce industry which Amazon is best known for by consumers, and the second being the cloud computing industry. Although Amazon continues to perform well, future growth may in fact be limited compared to other players in the industry.
The positive economic news from China is likely to have been one of the contributors to the rise of Amazon’s share price as many of Amazon’s third-party merchants source their goods from Chinese manufacturers. With COVID-19 having had an impact on the manufacturing industry worldwide, as a result of the workers not being able to go to work due to the virus, there were massive shipping delays for these merchants’ and therefore Amazon too. However, in recent weeks Amazon’s profits and sales have begun to increase as well as a return to normal shipping times, which was a welcome relief to both customers and businesses alike.
The growth in demand for Amazon’s services are a positive sign for purchasing Amazon’s shares. As people have stayed home during lockdown, they are relying more on cloud services provided by Amazon. In Q1 2020, Amazon Web Services (AWS) recorded revenues of $10.22 billion and it is likely that this will rise. Amazon also saw growth in its grocery services as lockdown restrictions resulted in panic buying, with physical store sales growing 8% YoY in Q1 2020. Amazon’s subscription services revenue, which includes the Prime membership fee, rose by 28% YoY to $5.6 billion. Since people were stuck at home due to COVID-19, they spent more time streaming movies on Amazon’s Prime Video. According to Olsavsky, Amazon Prime Video’s first-time viewers almost doubled in March.
But from a longer-term perspective, what has led to the incredible increase in the price of Amazon stocks is the firm’s dominance in two huge and rapidly growing markets: e-commerce and cloud computing. Amazon is the dominant player in the e-commerce space in the U.S., the U.K. and many other countries, and Amazon Web Services (AWS) is the clear leader in the global cloud infrastructure market beating even that of Microsoft’s Azure and Google’s cloud services. Together, these two industries which Amazon dominates in is expected to generate an annual revenue of around $7 trillion by 2023.
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- Price/Sales Ratio: The price-to-sales (P/S) ratio is a valuation ratio that compares a company’s stock price to its revenues. It is an indicator of the value placed on each dollar of a company’s sales or revenues.
- The Debt/Equity ratio: The debt-to-equity ratio is calculated by dividing a company’s total liabilities by its shareholder equity. It is used to evaluate a company’s financial leverage (i.e. how much of the firm is growing by using its own equity rather than borrowed funds)
- Enterprise Value/EBITDA: Enterprise multiple, also known as the EV multiple, is a ratio used to determine the value of a company. The enterprise multiple looks at a firm in the way that a potential acquirer would by considering the company’s debt. Stocks with an enterprise multiple of less than 7.5x based on the last 12 months (LTM) is generally considered a good value.
- Earnings per Share: Earnings per share is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability. The higher a company’s EPS, the more profitable it is considered.
- Earnings Yield: The earnings yield refers to the earnings per share for the most recent 12-month period divided by the current market price per share. The earnings yield (which is the inverse of the P/E ratio) shows the percentage of a company’s earnings per share. This metric is used by many investment managers to determine optimal asset allocations and is used by investors to determine which assets seem under-priced or overpriced.
- Year over Year – Year over Year (YoY) is a frequently used financial comparison for comparing two or more measurable events on an annualized basis. Looking at YOY performance allows for gauging if a company’s financial performance is improving, static, or worsening.