george clark
elevator pitch
My investment evaluation for Amazon.com, Inc. (NASDAQ: AMZN) stock remains to buy.
In our last November 1, 2022 article, we highlighted expectations for AMZN to report higher-than-expected operating profit and resume share buybacks this year.
in the The current article takes a long-term look at Amazon’s stock. I see Amazon increasing free cash flow and expanding operating margins in his five years. This justifies my purchase rating assigned by Amazon.
Where will Amazon stock be in five years?
Over the medium term, we expect Amazon to be more profitable and generate higher levels of free cash flow. My take on Amazon’s medium-term outlook is in line with Wall Street analyst consensus financial forecasts for the stock.
street S&P Capital IQ According to consensus data, the sell-side expects Amazon’s EBIT margin and free cash flow to exceed 10% and $100 billion in fiscal 2027, respectively. Free cash flow is $31 billion.
In my opinion, an increase in the percentage of revenue coming from high-margin businesses, Amazon Web Services (or AWS), and advertising services will likely lead to higher operating margins and stronger AMZN over the next five years. will be a major driver of strong free cash flow. AWS and advertising services accounted for 16% and 7% of Amazon’s revenue respectively in the first nine months of 2022. AWS said he achieved a 30% operating margin for the full year 2021, and Research analyst Benedict said his ad services business was even more profitable than his AWS, based on Evans estimates. It’s getting higher.
There is certainly room for advertising services and AWS to contribute a larger portion of AMZN’s top line in the future.
Amazon held its annual AWS re:Invent event in late November/early December last year. BofA Securities .
this of BofA Securities This report highlights specific metrics disclosed by the CEO of AWS. This suggests that AWS continues to gain significant traction from existing and new clients.Specifically, 9 out of 10 companies forbes The Cloud 100 list, a ranking of the world’s leading private cloud companies, is a customer of AWS.
Also, according to the CEO of AWS, AWS is securing more new customers and winning new projects with existing ones in the financial sector. of BofA Securities report. A key win for his AWS in the financial sector is that the Nasdaq MRX Options Exchange will be hosted on his AWS from December 2022. CEOs of AWS are Samsung ( OTCPK:SSNNF) (OTCPK:SSNNF), Airbnb (ABNB), Expedia (EXPE).
Apart from this, the public sector also continues to be an important source of new business opportunities for AWS. looking for alpha news AWS previously reported that on December 7, 2022, it shared the “Pentagon’s $9 Billion Cloud Award” related to the “Joint Warfighter Cloud Capabilities Agreement” with three other major technology companies.
Given the company’s backlog and industry forecasts, AWS’ medium-term growth prospects are excellent. On his latest Q3 2022 earnings call, Amazon said he reached $104 billion in AWS backlog growth of +57% year-over-year as of September 30, 2022. clarified. forester (FORR) estimates that the global public cloud market could reach $1 trillion by 2026.
Amazon’s advertising services business is another major growth driver for the company.
Advertising services accounted for only a low-single-digit percentage of Amazon’s top line at 9M in 2022. He predicts that the advertising services business could grow to account for 10% of AMZN’s revenue by 2027. My bullish view on the advertising services business’ growth outlook is supported by market forecasts and channel checks.
by a media research firm of GroupM Forecasts predict that the global retail media market will grow +58% over the next five years, from $101 billion in 2022 to $160 billion in 2027. A larger share of the market.
according to of Deutsche Bank (DB) Research report dated November 1, 2022 (unpublished) AMZN’s advertising services business gains market share in “Key Takeaways From unBoxed 2022”. DB Analyst’s conversations with advertisers at a recent industry summit suggested that “a platform like Amazon with a large and engaged customer base that can deliver comprehensive advertising campaign effectiveness” would be a better fit for advertisers’ budgets. It suggests that it is a larger part.
In a nutshell, I’m positive about Amazon’s five-year outlook and expect the company to post strong free cash flow and healthy profitability going forward.
What is short-term forecasting?
Analysts are bearish on AMZN’s near-term financial performance.
Based on consensus financial figures drawn from S&P Capital IQ, the short-term forecast is for Amazon to grow slower and become less profitable. Specifically, Wall Street expects AMZN top-line growth to slow from +14.7% yoy in Q3 2022 to +6.2% yoy in Q4 2022, with the sell-side , we expect Amazon’s EBIT margin to shrink from 2.0% to 1.8% over the same time frame. In other words, Amazon’s quarterly earnings call at the end of January doesn’t look good.
However, as we will highlight in the next section, this created an opportunity to buy Amazon stock.
AMZN Stock Key Indicators
Amazon’s valuation metrics show that the company’s valuation is now very attractive.
The market currently values AMZN at 12.6x the consensus EV/EBITDA over the next 12 months. S&P Capital IQAmazon’s current EV/EBITDA ratio is a 44% discount from its 15-year average EV/EBITDA metric of 22.5x. It’s worth noting that the last time Amazon’s future EV/EBITDA valuation multiple dipped below 13x was during the 2008-2009 global financial crisis.
The next section will focus on AMZN’s potential short-term catalysts.
What are the catalysts to watch out for?
Amazon’s main catalyst for the foreseeable future will be the beat of potential earnings in subsequent quarters.
Given that the global economy remains weak, AMZN’s better-than-expected financial results will depend on more aggressive cost management rather than the surprise of positive earnings growth.
As recent as January 4, 2023 looking for alpha news According to the article, AMZN plans to “lay off more than 18,000 employees.” This makes it more likely that Amazon’s near-term catalyst for lower-than-expected costs and higher-than-expected profitability will materialize.
Should I buy, sell or hold AMZN shares?
Maintain AMZN purchase ratings. Higher profit margins and stronger cash flow in the future should ultimately result in a positive revaluation of Amazon’s valuation.
