- The market was wrong at $400, but just as wrong at $300.
- At its present run rate sales should match $91 billion this year.
- A 2-1 price to sales ratio is not unreasonable for what is increasingly a tech stock.
Some months ago, I spotted a bargain in Amazon.com AMZN.
The company, which once traded at almost $400 per share, began a long, sickening plunge, one that briefly brought it down under $300 in May. I was a buyer throughout, eventually accumulating 100 shares at an average cost of $329/each
The cause had nothing to do with an investment case for the shares. It was fashion, a preference for profits over growth. As Amazon fell companies like Apple (NASDAQ:AAPL) rose, because they were delivering profits, not just growth.
Amazon still delivers growth, as it did before its fall. The first quarter of 2014 saw the company deliver 22% more revenue than in the same quarter a year earlier. If it keeps up that pace it will deliver almost $91 billion in revenue for the full year.
Put it this way - last year it was as big as Target (NYSE:TGT) was in 2012 U.S. sales. This year it could be as big as Kroger (NYSE:KR) was then. Yes, not all of Amazon's revenues are in the U.S. - the comparisons are made merely to give you a sense of scale.
Critics will note that this is profit-less growth. In general they're right - a black bottom line at Amazon seems to happen more by accident than by design. This is because, in order to fuel that growth, at its current scale, Amazon plows every dollar that comes in to new investment.
The way to measure Amazon is as a cash flow machine, specifically an operating cash flow machine. In 2010 it threw off nearly $3.5 billion in positive cash flow. By 2013 it was throwing off almost $5.5 billion. Much of that, too, was plowed right back into the business - the company's cash from investments were -$3.3 billion in 2010, rising to nearly -$4.3 billion in 2013.
What was this buying? Amazon doesn't like to break out its numbers, throwing Amazon Web Services (AWS) revenue into a catch-all category dubbed "other." During the first quarter of this year it brought in $1.2 billion under "other." It is by far the largest public cloud service in the world, and last week, at its annual cloud conference in New York, it announced more major client wins including Conde Nast, publisher of The New Yorker, Vogue and Wired, among other titles.
In an announcement that was heard across the publishing world, Conde Nast announced it was ditching its entire corporate computing infrastructure, selling its data centers, in favor of AWS.
The Conde Nast announcement represents a turning point in the history of cloud, where major enterprises are moving wholesale into a public cloud, and abandoning data centers it took many years and billions of dollars to build, because they're uneconomic as Web ad rates continue to deteriorate.
And that's just one very small piece of the Amazon tech puzzle. It's expanding its Kindle line, which began with e-book readers then went into media PDAs, into a full-fledged phone, built with apps that put its offers in front of shoppers while they walk around stores. Its physical infrastructure can now handle fresh goods, just like Kroger, and its subscription services are expanding from movies and TV shows back into books, where they began.
At $400/share, Amazon's market cap was nearly three times its sales. That's too high. At $300/share, it was barely twice its sales. A lot of smart alecks noted that it's common for retailers like Wal-Mart (NYSE:WMT) to price at half-sales, but in fact it turned out to be too low.
At its present price of $352, Amazon.com is selling at 1.78 times expected 2014 sales. That's also too low. A fair price, right now, is probably $182, which would be twice its expected 2014 sales. That adds about $20 to its present price, and as it continues to meet those extremely high expectations, I see it going up from there.