Amazon (AMZN)

Amazon (AMZN)

Is Amazon stock a good buy?

In this article, we review Amazon stock to determine if it’s a good buy, sell, or hold.

Amazon is a global technology company that focuses on eCommerce, cloud computing, digital streaming, and AI. Amazon is referred to as one of the Big Five information technology companies alongside Alphabet, Apple, Meta, and Microsoft. The company was founded in 1994 and is headquartered in Seattle, WA.

Tykr Rating

  • Summary: On Sale
  • Score: 11/20
  • MOS: 69%
  • Share Price: $2,485
  • Sticker Price: $8,112

Amazon Company History

  • In 1994, Jeff Bezos founded Amazon in his garage. The company was originally an online marketplace for books.
  • In 1997, Amazon went public at around $1.50 per share.
  • In 1998, Amazon began selling music and videos.
  • In 1999, Amazon began selling video games, consumer electronics, home improvement items, software, and toys.
  • In 2000, Amazon entered a 10-year agreement with Toys “R” Us, valued at $50M per year plus a cut of sales under which Toys “R” Us would be the exclusive supplier of toys and baby products on Amazon.
  • In 2001, Amazon entered into an agreement with Borders Group to sell books.
  • In 2004, Toys “R” Us sued Amazon because Amazon had knowingly allowed third-party sellers to offer toy and baby products on the platform.
  • In 2006, a court ruled in favor of Toys “R” Us, giving it the right to unwind its agreement with Amazon and Toys “R” Us was awarded $51M.
  • In 2006, Amazon also started FBA (Fulfillment by Amazon) which allowed individuals and small companies to sell products through the Amazon platform and Amazon would fulfill the delivery of those products.
  • In 2006, AWS was launched.
  • In 2007, Borders pulled out of the arrangement to start its own online store. This is where Hedge Fund Manager, Bill Ackman, made a significant bet on Borders and lost hundreds of millions of dollars.
  • In 2011, Amazon announced a partnership with DC Comics for the exclusive rights to many popular comics including Superman, Batman, Green Lantern, The Sandman, and Watchmen. This partnership has caused well-known bookstores like Barnes & Noble to remove these titles from their shelves.
  • In 2012, Amazon bought Kiva Systems to automate its inventory management.
  • In 2013, Amazon announced a partnership with USPS to begin delivering orders on Sundays.
  • In 2017, Amazon bought Whole Foods Market.
  • In 2017, Nike agreed to sell products through Amazon in exchange for better policing of counterfeit goods. This proved unsuccessful and Nike withdrew from the partnership in 2019. Other companies such as Ikea and Birkenstock also stopped selling through Amazon, citing similar frustrations as Nike.
  • In 2018, Amazon reached an agreement with Apple to sell selected products through the platform. Only Apple Authorized Resellers were allowed to sell through Amazon.
  • In 2021, Jeff Bezos announced that he would step down as CEO to become executive chair and Andy Jassy, previous CEO of AWS, became Amazon’s new CEO.

Amazon Business Model

Amazon’s business model is broken down into the following revenue streams.

eCommerce – 48% of revenue 

eCommerce includes products that are sold by 1st party (1P) and 2nd party (2P) sellers. A 1st party seller is a brand manufacturer that sells its products directly to Amazon, which then sells them to the shopper. Such products are labeled “Ships from and sold by Amazon.com”. A 2nd party seller is the type of seller who relies on the distributor partnership to get their products shipped. This is when a brand sells to a distribution partner and the retailer then buys from that partner. Such products are labeled the “Sold by brand, ships from Amazon”.

Third-Party Sellers – 22% of revenue

A 3rd party seller (3P) uses Amazon as a marketplace to sell directly to customers. Third-party sellers handle customer service for orders shipped directly from them unless the order is eligible for Amazon Prime. Their items are displayed as “Sold by merchant and Fulfilled by Amazon / Fulfilled by merchant”. This is the way to distinguish third-party sellers of Amazon products from the inventory of 1st party and 2nd party sellers.

AWS (Amazon Web Services) – 13% of revenue

AWS is an IaaS (Infrastructure as a Service) cloud hosting platform. Some of the largest customers that use AWS include Netflix, SAP, Salesforce, Pfizer, Disney, Sony, Hitachi, BP, Volkswagen, Pinterest, Finra, Ancestry, Expedia, Johnson & Johnson, and GE.

Advertising – 7% of revenue

Companies are able to place advertisements on Amazon.com.

Subscription Services – 6% of revenue

Some of Amazon’s subscription services include Amazon Prime, Prime Student, Prime Video, Amazon Music, Kindle Unlimited, and Audible.

Physical Stores – 3% of revenue

Amazon operates close to 600 physical stores in the US, with the majority being Whole Foods. The rest of the stores are Amazon-branded stores including Amazon Fresh, Amazon Go, Amazon 4-Star, Amazon Books, and Amazon Pop Up.

Other – .5% of revenue

The other category includes other brands under the Amazon umbrella including Amazon Maritime which allows Amazon to manage its shipments from China to the US, Eero which is a mesh network wi-fi, Goodreads which includes books, Ring which includes wi-fi powered smart doorbells and cameras, and Twitch which includes live streaming video gaming content.

Amazon News

This article from fool.com states that Amazon’s stock sank by close to 24% in April 2022. The EPS estimate was 8.36 and the reported came in at -7.56, which is under by 190%. This is the worst report since 2012. Amazon attributed its net loss for the first quarter of 2022 to a pre-tax valuation loss of $7.6 billion from its investment in EV manufacturer, Rivian Automotive.

This article from bloomberg.com states that eCommerce stocks such as Amazon, Shopify, and Etsy are all down due to inflation. Consumers are starting to spend less than they did a year ago.

This article from finance.yahoo.com states that because revenue is declining, the company now needs to focus on business efficiency with supply chain being a primary area of improvement. 

This article from fool.com states that long-term investors shouldn’t give up on Amazon. AWS revenue increased by 37% year-over-year. Yes, eCommerce is seeing some strong headwinds at the moment due to inflation, but it most likely won’t last forever. 

Amazon Competition

We’ll break down the competition into two main categories.

Ecommerce 

Amazon (AMZN)

  • Summary: On Sale
  • Score: 11/20
  • MOS: 69%
  • Share Price: $2,485
  • Sticker Price: $8,112

Shopify (SHOP)

  • Summary: On Sale
  • Score: 12/20
  • MOS: 52%
  • Share Price: $465
  • Sticker Price: $975

Target (TGT)

  • Summary: Overpriced
  • Score: 9/20
  • MOS: 45%
  • Share Price: $232
  • Sticker Price: $420

Walmart (WMT)

  • Summary: Overpriced
  • Score: 9/20
  • MOS: 13%
  • Share Price: $152
  • Sticker Price: $176

Cloud Computing

Amazon (AMZN)

  • Summary: On Sale
  • Score: 11/20
  • MOS: 69%
  • Share Price: $2,485
  • Sticker Price: $8,112

Google (GOOGL)

  • Summary: On Sale
  • Score: 17/20
  • MOS: 80%
  • Share Price: $2,346
  • Sticker Price: $11,795

Microsoft (MSFT)

  • Summary: On Sale
  • Score: 17/20
  • MOS: 68%
  • Share Price: $281
  • Sticker Price: $874

VMware (VMW)

  • Summary: Overpriced
  • Score: 8/20
  • MOS: 1%
  • Share Price: $109
  • Sticker Price: $110

Rackspace Technology (RXT)

  • Summary: On Sale
  • Score: 10/20
  • MOS: 60%
  • Share Price: $10
  • Sticker Price: $25

Amazon 4M’s

MOS: Although eCommerce sales have declined, it’s important to point out that AWS sales continue to increase. AWS cloud hosting is a sticky product. Customers aren’t going to try AWS for a few months, they will commit to the platform for 5, 7, and sometimes 10 years or more. This revenue channel will continue to do very well. With eCommerce, if you look back at the recession of 2008, the share price went from $80 down to $35, a 56% loss. By the end of 2009, the share price went up to $135 which is a 285% return since the low. This bear market may be causing some pain for Amazon and other eCommerce investors today but it most likely won’t last. When the economy springs back, eCommerce sales will most likely increase.

Meaning: Amazon has a variety of revenue streams that make this a healthy overall business model. eCommerce, third-party sellers, AWS, advertising, and subscription are all revenue channels that won’t go away.

Moat: On the eCommerce side, Target, Walmart, and Shopify are some of the top competitors but Amazon is still the top player. The ecosystem of sellers and the automation of the supply chain make Amazon hard to compete with. On the cloud computing side, the top competitors include Azure and Google Cloud. To avoid being called a monopoly, it’s important that Azure and Google Cloud remain in place. In other words, they need each other to avoid a breakup caused by the US government. Fortunately, there is plenty of business to go around as all three companies can thrive.

Management: Andy Jassy became CEO of Amazon in July of 2021. Prior to working at Amazon, he worked as a Project Manager at a collectibles company. He joined Amazon in 1997 as a Marketing Manager. In 2003, Jassy and Bezos came up with the idea to create a cloud hosting platform. The idea came to life and AWS launched in 2006 where Jassy lead AWS initially with 57 employees. In 2016, Jassy was named CEO of AWS. Most of Jassy’s career has been spent working on AWS, not eCommerce. AWS has proven to be a strong revenue channel for Amazon but it only accounts for only 13% of the revenue. This means Jassy has to focus his attention on the eCommerce side of the company and if they indeed want to see their share price increase, they have to focus on that EPS. Optimizing supply chain efficiencies is their next big objective and that won’t happen overnight. Within the next few earnings reports, it’ll be important to hear Jassy’s comments on operational improvements.

Amazon Financials

Revenue (Found on the Income Statement)

  • 2018:  $232B
  • 2019:  $280B
  • 2020:  $386B
  • 2021:  $469B
  • Annual revenue has consistently increased year over year which is a great sign. The issue is the most recent quarterly revenue went from $137B down to $116B.

Net Income (Found on the Income Statement)

  • 2018:  $10B
  • 2019:  $11B
  • 2020:  $21B
  • 2021:  $33B
  • Net Income has increased year over year which is a great sign. The issue is the most recent quarterly net income went from $14B down to -$3.8B.

EPS (Found on the Income Statement)

  • 2018:  20.68
  • 2019:  23.46
  • 2020:  42.64
  • 2021:  65.96
  • Annual EPS has increased year over year which is a great sign. The issue is the quarterly EPS went from 28.21 down to -7.56. 

Free Cash Flow (Found on the Cash Flow Statement)

  • 2018:  $17.2B
  • 2019:  $21.6B
  • 2020:  $25.9B
  • 2021:  -$14.7B
  • Free Cash Flow significantly declined in 2021. 

Total Assets (Found on the Balance Sheet)

  • 2018:  $162B
  • 2019:  $225B
  • 2020:  $321B
  • 2021:  $420B
  • Total Assets have consistently increased which is a great sign.

Total Liabilities (Found on the Balance Sheet)

  • 2018:  $119B
  • 2019:  $163B
  • 2020:  $227B
  • 2021:  $282B
  • Total Liabilities have increased which is okay.

Total Debt (Found on the Balance Sheet)

  • 2018:  $39B
  • 2019:  $63B
  • 2020:  $84B
  • 2021:  $116B
  • Total Debt has increased.

Total Equity (Found on the Balance Sheet)

  • 2018:  $43B
  • 2019:  $62B
  • 2020:  $93B
  • 2021:  $138B
  • Total Equity has increased year over year which is a great sign.

In summary, is Amazon a good buy?

If I were a shareholder, I would keep holding this stock. I would not sell and take a loss. We know eCommerce was hit in 2008 when the share price went down 56% but it corrected nicely in 2009. Right now, this stock is down about 33% from its all-time high which isn’t nearly as bad. Similar to the previous review on Netflix, I would wait for the next few earnings reports to show positive signs and at that time, I would stockpile into Amazon.

The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.