More Upside for AMZN Stock
So far, 2016 has been tough for Amazon.com, Inc. (NASDAQ:AMZN) shareholders. AMZN stock is down about eight percent for the year, after the company reported lower-than-expected fourth-quarter earnings back in January. But investors are just fickle. The e-commerce giant is investing tons of money back into the company for future growth, which has made it hard to predict earnings.
As the company continues to grow, AMZN stock should reward shareholders nicely over the next few years. Here are three reasons why that could happen.
Amazon has become so big that it is now one of the most valuable brand names in the world. When you want to shop for something online, Amazon.com is usually the go-to site. And for that reason, Forbes ranks Amazon the 13th most valuable brand in the world, with a brand value of $28.1 billion. (Source: “The World’s Most Valuable Brands,” Forbes, last accessed April 26, 2016.)
The company dominates online retail. No other company comes even close and every year, Amazon keeps widening its lead. Amazon generated sales of $107 billion in 2015, while it’s closest rival, eBay Inc (NASDAQ:EBAY), had sales of $8.6 billion in the same period.
What’s impressive, too, is that given that Amazon is a $300-billion company, it’s still undergoing explosive growth. In 2015, sales grew 26% in constant currency. Again, eBay doesn’t even come close to Amazon in this area. In the same period, eBay grew sales a measly five percent in constant currency.
Speaking of growth, Amazon has several catalysts in the works that should keep the company growing for years to come. But one catalyst that is showing the most potential today is the company’s cloud computing business, “Amazon Web Services” (AWS).
AWS sales grew 69% in the fourth quarter over the same period last year and 70% for 2015. (Source: “Amazon.com Announces Fourth Quarter Sales Up 22% to $35.7 Billion,” Amazon.com, Inc., January 28, 2016.) AWS almost has an impressive $10.0 billion in annual sales and about one million users. (Source: “Amazon cloud has 1 million users and is near $10 billion in annual sales,” Ars Technica, April 7, 2016.)
Amazon dominates cloud computing, too, with 36.9% of the market. Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc (NASDAQ:GOOG) trail far behind with 8.7% and 2.5% of the market, respectively. (Source: “Amazon and Microsoft to Face Off in Cloud Computing Space,” Market Realist, February 9, 2016.)
Amazon is starting to face increasing competition in the market, particularly from Google, but there’s still lots growth in the market that Amazon can capitalize on. Cloud computing sales are expected to rise to $27.4 billion in 2016 compared to $14.9 billion in 2014, according to Synergy Research Group. (Source: Ibid.)
Massive Cash Flows
As I mentioned, Amazon is investing heavily for future growth. The company no longer just sells books online. Amazon is plowing dough into areas such as technology, video streaming, and the creation of its own logistics service. This means that margins are going to be thin for the time being, which is something investors don’t like seeing, but that’s OK.
Amazon is still generating enormous cash flow, which keeps growing year after year. In 2015, Amazon’s free cash flow hit $7.33 billion, which is up from $1.95 billion in 2014 and $395 million in 2012. (Source: “Annual Financials for Amazon.com Inc,” MarketWatch, last accessed April 26, 2016.)
When you value AMZN stock on a free cash flow basis, the stock seems relatively cheap. AMZN stock is trading at about 40 times its free cash flow. This compares to a price-to-earnings ratio for AMZN stock of about 70.
The Bottom Line on AMZN Stock
AMZN may be having a rough year so far, but it shouldn’t stay that way for long. With an incredibly strong brand name, lots of growth, and massive cash flows, AMZN stock should have no problem getting back on an upward trend.