Amazon Stock: Why Trump Rhetoric is a Buying Opportunity

Amazon stock analysis
iStock.com/Julie Clopper

Amazon on Sale as Trump Attacks

Amazon.com, Inc. (NASDAQ:AMZN) lost about $55.0 billion in value on March 28 on an escalation of attacks from President Trump, blaming the company for hurting the retail sector along with not paying adequate taxes to the government coffers.

Now the fresh attacks on Amazon and CEO Jeff Bezos shouldn’t be a surprise, as it has been in play for a while.

Pushing politics aside, it is valid that Amazon has negatively impacted the retail sector and in fact creates havoc whenever it announces a new venture in a business.

This could be Amazon potentially looking in the pharmacy, grocery, insurance, and travel areas to name a few targets for expanding sort chest to its “Amazon Prime” members.

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But whether you agree with the expansion of Amazon into other businesses, the reality is it’s about less regulation and the ability of companies to innovate and compete.

Who knows how far AMZN stock will decline on the concerns of increased regulation and tax implications, but in my view, major weakness lower towards the previous $1,100 breakout level would be an intriguing opportunity.

Chart Courtesy: Stockcharts.com

Fundamentally, Amazon stock is not cheap, even with the current selling. However, the company is innovative, and given its massive scale, the potential is extraordinary.

Why AMZN Stock Shouldn’t Be Valued on Old Principles

AMZN stock trades at 90 times its 2019 earnings per share and at a PEG Ratio of 7.17, which is staggering if you follow the teachings of infamous value investor Benjamin Graham.

Yet Amazon deserves a much higher multiple due to the power it has in the online retail sector, as well as the major growth in its Amazon Web Services segment, which includes the cloud.

Let’s be clear: Amazon stock is not simply a seller of online goods, but a massively growing ecosystem of tens of millions of loyal users looking to buy goods and services for their computers, tablets, or smartphones.

The fact is that Amazon makes a lot of money. The company had free cash flow of about $9.41 billion in 2017, equating to 72 times its market-cap or 82 times enterprise value. Again, not cheap, but the superlative growth prospects support the valuation.

Look at the revenue growth of 31% in 2017 and 27% in 2016 for AMZN stock. The growth is expected to be strong at 31.3% in 2018 and 21.7% in 2019. (Source: “Amazon.com, Inc. (AMZN),” Yahoo! Finance, last accessed March 29, 2018.)

Amazon is also expanding its key gross margin. This metric was 33% in 2015, 35% in 2016, and 37% in 2017.

Analyst’s Take

So while the Trump impact on Amazon stock cannot be overlooked, the reality is that the company is a top long-term technology stock holding that is worth a closer look on the current market weakness.