I last wrote about AMZN last September, conducting a high level valuation analysis based on a series of valuation inputs obtained from a Twitter poll. I was unnecessarily cautious on the stock, but fortunately concluded that it is never one to short given the powerful secular tailwind(s) at its back.
Sales estimates continue to be revised upward for AMZN, a “direction of fundamentals” trend that, if continued, is likely to keep the stock on its upward trajectory. But despite the outrageous growth profile and world class leadership by Bezos, the stock is increasingly at risk of disappointment, IMO. Consider, Factset consensus estimates for 2022 call for a 5.5% operating profit margin for Retail, and a 30%+ operating profit margin for AWS (off the top of my head for AWS). I will outline my fair value work soon, but in short, to justify the current stock price AMZN must accumulate the equivalent of 50% of annual NOPAT over the next five years and trade at 25 times NOPAT at the end of 2022. (I do not have the Retail and AWS top-line growth rates off the top of my head, but will update the post accordingly.) Again IMO, these estimates are increasingly aggressive, and thus setting the stock up for disappointment.
What the “lower left to upper right” chart-hugging AMZN super-bulls would likely respond with is: *You* are not accounting for the ever-present upside risk of Bezos/AMZN inventing another AWS out of thin air, which makes current estimates potentially dramatically conservative. Bezos himself has hinted at “Amazon Studios” as perhaps the next AWS. And who knows what AMZN can do with Whole Foods under the umbrella. So I am fully aware of the risk.
But I am willing to take that upside risk by continuing to avoid the stock, while building up my knowledge of the company in anticipation for when the market begins to doubt the wisdom of Bezos’ long-term vision. Put it this way, I would rather buy the stock at current levels three years from now, having fallen from $2,000, with Amazon Studios as a key contributor to long-term earnings power but with estimates calling for 4% Retail and 20% AWS operating profit margins.
As demonstrated by this NYT article on Bezos today, sentiment is far, far away from doubting AMZN’s long-term future.