Shareholders of Amazon (NASDAQ:AMZN) have lost a lot over the past year, as the stock price has dropped to almost half of its 52-week high of $180. But now is the time to focus on good companies like this one that you can get for cheap.
I’ve held stocks through two recessions, so I know how important it is to invest in promising companies when things look bad. This was the case with REITs like Kimco Realty (NYSE:KIM) and Simon Property Group (NYSE:SPG), which have more than tripled and doubled since their pandemic lows.
I see parallels in badly hit tech stocks like Amazon right now. In this article, I’ll explain why Amazon could be a tremendous long-term value buy at its current price.
A Leader in Technology With a Strong Bank Account
Amazon is the best place for consumers, businesses, and retailers. It is one of the few companies that has stayed at the top of its market for years and keeps growing its market share by using technology, data, and good customer service.
Amazon also has a lot of cash and is expected to make a lot of money without spending it over the next few years. With such a significant war chest, it can easily put money into new projects or buy companies that will help it get a bigger market share and make more money. This includes $58.7 billion in cash on hand and $65.6 billion in long-term debt, which helped it get an AA credit rating from S&P, just one step below the US Government.
Business Fundamentals
Amazon is doing well in the current economy, with sales up 15% year over year (19% in constant currency) to $127 billion, which is more than the market capitalization of most S&P 500 companies (SPY). This was primarily because of strong sales in North America, which rose by 20% from the previous year to $79 billion.
Also, Amazon Web Services, the company’s cloud-computing business, is still growing quickly. This is likely to be a significant revenue source for many years, even as Microsoft Azure and Google Cloud Platform become stronger competitors. In the most recent quarter, AWS’s revenue grew by 27% year over year and by 28% when currency effects were taken into account. This shows that people are still interested in its services.
As shown in the graph below, AWS still has the most market share in the cloud market. At the end of the third quarter, AWS had 34% of the market, which was much more than competitors Azure (NASDAQ:MSFT) and Google Cloud (NASDAQ:GOOGL).
Cloud and Headline Risks
Aside from inflation, one of the biggest financial stories this year has been the strengthening of the US dollar, which has made it hard for US multinational corporations to change their money. This is shown by the fact that sales in the international segment fell 5% year over year, but when foreign exchange rates were taken out, they went up 12%.
Even though AWS has been doing well, its growth is slowing. High inflation and rising energy costs are acting as headwinds. Because of this, management has seen an increase in AWS customers worried about keeping costs down.
This is an opportunity, though, because AWS’s wide range of services lets it move storage to lower-cost tiers and workloads to Graviton3 processors, which are 40% more cost-effective than similar x86-based instances. AWS also wants to grow in terms of where it is located. It recently expanded into the Middle East and Asia-Pacific region in Thailand.
How Things Look
I still believe in the long-term growth thesis since currency effects should even out over time. Also, Amazon’s wide range of services acts as a moat, allowing it to attract a wide range of customers into its ecosystem. This gives the company a moat that will last for a long time. In a recent analyst report, Morningstar pointed out the following things:
The long-term trend toward e-commerce is still going strong, and the company is gaining market share despite its size. Prime ties together all of Amazon’s online shopping efforts and brings in a steady stream of high-margin recurring revenue from customers who buy more from Amazon’s sites. In exchange, customers get one-day shipping on millions of items, exclusive video content, and other services. This creates a powerful virtuous circle in which customers and sellers attract each other.
Valuation
Lastly, the price of Amazon stock is too low at $93.41, which is almost 50% less than its 52-week high. Since Amazon is still growing, a price-to-operating cash flow method is a better way to determine its fair value.
Amazon’s current blended price to operating cash flow ratio is 19.7, much lower than its standard P/OCF ratio of 26.9. Given that the business has a moat that has grown recently and that analysts expect strong growth in the coming years, a P/OCF ratio of at least 25x is fair.
What Investors Need to Know
Amazon stock is one of the best investments you can make now, and now is an excellent time to buy it. The long-term growth thesis is still valid because currency effects are expected to even out over time, and AWS is still the leader in the cloud market. Also, Amazon is a good buy at its current price because it has a business with a moat, is valued significantly lower than in the past, and analysts expect it to grow strongly in the coming years.
Featured Image – Pexels © James Anthony
