Tuesday, May 23, 2023

Why Amazon Is (Still) a Screaming Buy Today

By Whitney Tilson (View Archive)

If you're anything like most investors, you probably think you missed the boat on investing in e-commerce juggernaut Amazon (AMZN)...

And at first glance, it's hard to argue with it: Every $1,000 invested in AMZN shares on May 15, 1997, would be worth about $1.3 million today.

Of course, to do that, you would have also had to hold on for dear life through multiple 40%-plus pullbacks like the one we've seen over the past year.

I was smart enough to buy $109,400 worth of AMZN shares back in June 1999 at a split-adjusted average price of $2.74 per share. Sadly, I didn't hold on for the long run. But that's OK... As I'll explain in today's essay, they're still a no-brainer at today's levels.

Back when I first bought shares, Amazon was a five-year-old online bookseller...

It was still years away from launching Amazon Prime, its Alexa smart assistant, the Kindle e-book reader, or its Amazon Web Services ("AWS") cloud-computing service.

I was convinced Amazon was more valuable as a brand than its $20 billion market cap suggested at the time. And I was sure its platform was going to spread. But I wanted a second opinion...

One of my favorite ways to get up to speed on investing ideas is to bat them back and forth with other smart people...

I opened up my laptop and traded several e-mails on the topic with Bill Ackman's business partner David Berkowitz, my friend Chris Stavrou, and my longtime friend (and now colleague!) Herb Greenberg. As I told Herb in an e-mail on October 5, 1999...

From a year ago, AMZN has moved from being solely a book seller to a) selling toys, music, videos, electronics, etc.; b) having auctions, including an investment in/partnership with Sotheby's; c) expanding to the UK and Germany; and d) taking stakes in many categories (Drugstore.com, Pets.com, Gear.com, HomeGrocer.com, Della & James).

In short, in only one year, AMZN has made tremendous strides toward becoming a broad-based e-commerce company and positioning AMZN to go after the $5 trillion global retail market.

I also pointed out that Amazon's annual sales were 3.5 times that of its main competitors as a group and 8 times that of its single largest competitor. Plus, despite its youth, it was already the 16th most trusted brand in America.

The company had also made huge progress in building a world-class management team. It hired Joe Galli, a longtime Black & Decker executive, as its president and COO. It also hired Delta Air Lines' (DAL) CFO Warren Jenson for the same position and Honeywell's (HON) Jeff Wilke to head up operations.

As I told Herb, Amazon was just scratching the surface...

In the five categories which Amazon is active in (and Amazon is quickly moving into new categories), there is room for huge growth in the U.S. and world markets:

In short, I had been an Amazon customer for a few years and loved it, and I felt that the company had a wide-open field in front of it.

About seven months after I bought Amazon shares, the stock had more than doubled. I felt great about my investment, but I was growing cautious about the looming tech bubble that I thought was bound to burst. So I sold my entire position on March 9, 2000 – one day before the Nasdaq Composite Index peaked.

For a while, I felt like a genius. Amazon shares went on to fall more than 90% over the next 18 months. But as we all know now, I had actually made a huge mistake... Had I simply held my shares, my initial stake would have been worth nearly $5 million today. (Argh!)

With the stock up more than 115,000% over the past 25 years, you might think it's too late to buy the stock today...

But you'd be wrong. You see, it all starts with the "S Curve."

Back in the 1950s, an Ohio State professor named Everett Rogers researched the adoption of new agricultural technologies among local farmers. His findings led him to develop a general theory that describes the way new ideas are adopted.

Rogers proposed that adopters of a new innovation resemble a normal, "bell curve" distribution.

First, a small, adventurous group ("innovators") experiments with the new idea. Then, a larger group ("early adopters") follows, providing the necessary momentum for the idea to become more popular. If maintained, the momentum leads to the masses – first, the early majority, followed by the late majority – to adopt it.

As you can see in the following graphic, the cumulative adoption curve looks like an "S," hence the name S-Curve...

What does that have to do with Amazon?

Well, we all know Amazon is an e-commerce giant – and it's still growing rapidly. Last year, the company grew its revenue by 10% to $514 billion.

But what you might not realize is that thousands of small companies rely on Amazon to sell their products. They use Amazon Marketplace to access customers, accept payments, and even ship items.

As such, Amazon accounts for more than half of all U.S. online retail sales. But of the roughly $4 trillion that American consumers spent on goods and services last year, only 20% of that came from online purchases.

In other words, e-commerce penetration is still in the early stages of the S-Curve...

When Amazon introduced Amazon Prime in 2005, it changed the world of online shopping forever. The annual membership offered free two-day shipping on most purchases.

It built strong customer loyalty... But more important, it changed consumer behavior. According to market-research firm Consumer Intelligence Research Partners, Prime members spend more than $3,000 a year, double what nonmembers spend.

Prime has become the gold standard for online retail. An estimated 150 million Prime members pay Amazon $139 a year to use its service, which has expanded to include Prime Video, a competitor to video-streaming company Netflix (NFLX).

Of course, two-day – not to mention one-day or even same-day – shipping is expensive and requires dozens of warehouses, which cumulatively cover more than 319 million square feet – or more than 5,500 football fields!

But both the upfront and ongoing costs associated with new fulfillment centers are beginning to drop, which should boost Amazon's operating margins by more than a full percentage point in the next couple of years.

That might not sound like much, but with nearly $525 billion in revenue, that's roughly $5.3 billion of extra operating income!

In addition to being one of the world's largest retailers, Amazon is also the world's largest cloud-computing company...

AWS helps other companies run their businesses in the cloud. They use Amazon's equipment and software because it's cheaper, faster, and more secure than having to buy their own.

It's a fast-growing, high-margin business with an incredible growth runway. AWS revenues ballooned from $3 billion in 2013 to $80 billion last year. But while businesses spent nearly $4 trillion on information technology last year, less than 10% of that went toward cloud computing.

The cloud is still in the early adoption stage of the S-Curve as well, as you can see in this chart...

Many investors have found Amazon difficult to value because it has always prioritized growth over profits...

Thus, it's always traded at a high multiple of reported earnings.

At first glance, Amazon seems to only make money from AWS, plus a small but highly profitable and rapidly growing advertising business. Meanwhile, the retail side of the business sports thin margins.

In reality, Amazon's huge upfront expenses are hiding a good retail business and an excellent advertising one. This is a great thing: The company is investing now to gain as many customers as possible, forgoing today's profits to make vastly more profits in the future.

Now that Amazon's huge investments in growth seem to be reaching a crescendo, operating margins should rise considerably over the next few years.

With shares currently around $115 and more than $5 in potential EPS in 2024, that's around 23 times the future price-to-earnings multiple – an extremely reasonable figure for a company like this that has only just begun to show its true cash flow potential.

With a $1.1 trillion market cap, it's unlikely that Amazon will be a multi-bagger anytime soon... but it's nowhere near as risky as it once was.

In summary, I think AMZN shares are an absolute steal at today's levels.

But if you're looking for legitimate chances at 500% to 1,000% upside in your portfolio, you have to look elsewhere...

That's why I just sat down on camera with my friend Louis Navellier, a billion-dollar money manager who grew his fund 4,000% over 15 years.

He and I are sharing the same surprising prediction about stocks in 2023. It all starts with a historic event in Las Vegas, which we believe could create a wave of millionaires on a single investment, if you get in now, while prices are still cheap. 

We may look back on this as a moment that could change everything about the market for the next decade. If nothing else, we share a free stock idea – ticker symbol included – just for tuning in. Click here to watch this brand-new presentation.


Whitney Tilson
May 23, 2023