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The Index of the Economy

November 05, 2020

The near mania of the US stock market over the past few days, especially in technology stocks, has me questioning valuations and numbers.

However, there’s one high-flying stock that, by the numbers, still makes for a buy even now—Amazon (AMZN).

Big company, big-thinking CEO, big expansion and ubiquitous presence in nearly all facets of daily life. The growth just keeps coming.

Online platform for retail goods. Streaming content. And cloud computing power. It now rules the market worldwide. And even with competitors, its Amazon Web Services (AWS) remains the go-to for private and government entities.

And like it did for AWS, the company built out its logistics and delivery networks for its online sales and has opened it up for vendors and companies that are now completely dependent upon its online platform and its delivery and warehouse networks.

The past year has been the big proof that this is more than just a company and a stock. In April, I concluded that Amazon was really an index of operations that make the economy the economy.

Since my recommendation, AMZN has returned 41.4%. That’s 52.4% better than the return of the S&P 500 for the same time. It only gave up 5.3% during the plunge in February through March 23, which is remarkable.

Numbers, Numbers

Investors and traders have been eager to blithely buy stocks without really questioning or even looking at the numbers. But for Amazon, there are plenty of numbers to affirm its strength.

Revenue and revenue growth are the prime drivers for the company. Revenue over the trailing year is up across its core operating segments by 20.5%.

Amazon Revenue—Source: Bloomberg Finance, L.P.

This includes all of the mega-challenges of getting sales fulfilled during the initial lockdowns. But revenue continues to expand by 23.1% on a compound annual growth rate (CAGR) basis.

Amazon Segment Revenue Growth—Source: Bloomberg Finance, L.P.

Amazon gets to this revenue growth primarily from four core operating segments. The first is online stores, where revenue in the most recent report is advancing at 38.0%.

Next is subscription services, which includes Prime Membership as well as music, books and other services. This was up for the most recent quarter by 33.0%. This segment is becoming ever more sticky as households become locked in to the world of Amazon.

Third is even more important than even its own store sales or subscriptions—third-party services. COVID-19 was a wake-up call for companies and retailers around the globe. Physical stores just don’t work like they used to.

Amazon makes the move to online work immediately for its third-party clients. Brands don’t have to worry about making websites, logistics and customer service work. Amazon does that. Even brands that resisted Amazon now see its advantages.

Third Party Seller Service revenue was up 55.0% and is ramping up. I see this segment getting even more attention from both sellers and buyers.

And now AWS. Cloud is what gets the stock market all into a tizzy. Companies and governments around the globe, including Uncle Sam, all run and store data on AWS. In the most recent quarter alone, it gained 29.0%.

And then there are the other bits of the company. Physical stores have been experimental learning centers. And Whole Foods is another experiment on grocery and fresh food markets. Amazon is getting to the next level on making shopping easier and better week by week.

The US is the prime market for Amazon at $170.8 billion in revenue last year. Its revenue beyond these shores is $74.7 billion. But it has just tapped into that market. Partnerships and acquisitions are happening around the globe over the quarters to follow. AWS builds trust since it’s already beyond borders.

Margin is where Amazon has challenges. As noted, growth in revenue is the driver, but operating margins are beginning to show up. Right now, it is sitting at 5.2% which is not great, but it is impressive for the huge reach and go-go nature of the company.

Amazon Operating Margin—Source: Bloomberg Finance, L.P.

That works to deliver a return on equity of 25.0% to shareholders, which dwarfs so many of the other big-name tech stocks that get so much attention right now.

The balance sheet is fine. Lots of cash with coverage for liabilities. Remember, Amazon is more like a utility when it comes to cash flowing into its coffers month after month.

Debts? Only 34.4% of assets, and debt deals have been done as appropriate to pay for things like Whole Foods. The issuance this year may well be part of furthering its own immense and ever-more capable operations.

While the stock continues up, it isn’t silly in its valuation. Right now, you can buy Amazon at only 4.8 times trailing sales. That’s a fraction of other big tech stocks.

I know that there’s no dividend now. And that it’s a well-touted entity by many. But I see this as an index-as-a-company that has proven its ability to deliver to shareholders and consumers.

AMZN remains a great buy even now, ideally for a tax-free account.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life