In investing, there is no point in originality, so following the smartest investors is often profitable.
Bill Miller, Chairman and Chief Investment Officer of Miller Value Partners, a $1.9 billion fund, is known for his portfolio outperforming the market every year from 1991 to 2005 as Legg Mason’s Chief Investment Officer. It is
Miller was an early investor. Amazon (AMZN 0.19%)and he’s pitching his stock again on a recent episode of CNBC closing bell He thinks the stock is attractive at its current price.
Miller said the stock is set to recover, calling it “one of the easiest names in the market today.” The value investor touted strong growth in Amazon Web Services (AWS), the cloud computing division, and said he expects revenue to grow 25% over the next three years. From an estimated $80 billion revenue in 2022, AWS revenue will be his $156 billion, and with an estimated 30% operating margin, operating profit will be $47 billion.
According to Miller, the value of AWS alone basically justifies Amazon’s current market capitalization, giving investors free access to other businesses such as e-commerce and logistics. He also credits CEO Andy Jassy’s management team for predicting a sharp acceleration in free cash flow, predicting the company’s free cash flow will reach $60 billion by 2025.
The company’s warehouse and data center expansion has slowed, and with $47 billion in operating income from AWS, the assumption seems to be that it won’t need much from other businesses to round off the remaining $60 billion. .
Based on the company’s $916 billion market capitalization, that means it’s trading at just over 15 times its free cash flow in 2025, a low price for one of the market’s favorite growth stocks.
Is Miller Right About Amazon Stock?
Given Amazon’s current earnings results, the company expects $60 billion in free cash after forecasting just 2% to 8% in the fourth quarter and reporting negative free cash flow of $19.7 over the past four quarters. It may be hard to imagine that it produces a flow.
The company also warns of macro headwinds for both AWS and its e-commerce business. Both recent results and Q4 guidance demonstrate the challenges facing Amazon.
But if things go well for Amazon, both in the economy as a whole and in its own run, it’s easy to see how the stock will turn around. AWS continues to be a juggernaut, hitting 27% in the most recent quarter, and it’s hard to expect it to grow 25% annually over the next three years, especially as cloud infrastructure becomes a multi-trillion dollar market. It’s not unreasonable.
Meanwhile, the company cut costs on multiple fronts, laying off 18,000 corporate employees, closing or canceling dozens of warehouses, closing unprofitable startups like Amazon Care, and freezing hiring. doing.
These moves should help deliver meaningful margin improvements as the non-AWS business looks like it has a lot of fat to cut. Having lost more than $8 billion by the third quarter of 2019, it may need more than cost cutting to get its e-commerce business off the ground. Amazon also needs to find ways to reaccelerate revenue growth. This will be difficult in a recession, especially for companies whose revenues in 2022 are expected to exceed $500 billion.
Miller’s prediction of $60 billion in free cash flow in 2025 sounds like a best-case scenario for Amazon, but he’s right about the recovery. The stock has fallen 50% from its 2021 peak and looks oversold.
The company faces challenges, but Amazon’s potential far outweighs the downside risks.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has a position at Amazon.com. The Motley Fool has a position on and recommends Amazon.com. The Motley Fool’s U.S. headquarters has a disclosure policy.