Amazon Is Still A Startup

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About: Amazon.com, Inc. (AMZN), Includes: AAPL, MSFT
by: Oleh Kombaiev
Summary

By and large there are three key phases of a company's life cycle.

If you look through such a prism at Apple, all the signs of approaching old age are obvious.

In the case of Microsoft there are all the signs of maturity.

But it's not so easy to talk about Amazon.

Before you perform a fundamental analysis of a company, probably you should first determine at what stage of its life cycle this company is. Otherwise, you run the risk of using inappropriate assessment tools and getting false results.

There are various attempts to define the main phases of a company’s life cycle and here are illustrations of some of them:

Source: FREE Corporate Finance Class

Source: aswathdamodaran.blogspot.com

In principle, they all distinguish three key phases:

  1. Youth ‒ a revolutionary product, revenue and losses are increasing.
  2. Maturity ‒ the evolution of the product, revenue growth slows down, stable profit, debts are accumulating.

  3. Old age ‒ a decline in revenue and profit growth rates, dividend payout and buyback.

If you look through such a prism, for example, at Apple (AAPL), everything is more or less clear.

After a series of attempts and failures, the company launched its main product, the iPhone. Then there was a period of evolution which has resulted in the creation of the Apple ecosystem, and now it is precisely through it that the company hopes to avoid a slowdown in growth.

At the same time, Apple is increasing its dividend payout and implementing a large-scale payback program. All the signs of approaching old age are obvious. By the way, rumors about the Titan project seem quite natural against this background ‒ Apple is trying to be reborn with a new revolutionary product. Will it manage to do it? The question is mostly related to your subjective belief in the future of Apple.

Another classic example is Microsoft (MSFT). Its revolutionary product is Office which continues to evolve. Timely investment in cloud technologies was an additional impetus to the company. Now Microsoft is also looking for ways to rebirth as indicated by its acquisition of LinkedIn and GitHub. And Microsoft pays dividends. These are the signs of maturity.

Image result for Microsoft Office evolution

Source: SlideShare

Well, and now let's look at Amazon (AMZN). It's not so easy... First of all, what is Amazon’s revolutionary product?..... AWS is not counted, because, by and large, this direction should be singled out as a separate company.

In my opinion, the most accurate way is to say that Amazon’s product is its business platform which brings about an army of loyal customers. And while the number of prime members is growing, this product continues to be revolutionary.

Is it possible to say that Amazon’s quantitative growth limit is close?

I do not think so. Look at this chart of millennials’ preferences. They use different social networks and messengers, but the Amazon app is a must-have. This means that a generational change is not a threat to Amazon, in contrast to, for example, Facebook (FB).

Now let us look at the company’s operating performance.

Of the companies mentioned, for the last three years Amazon’s revenue growth rate remained the highest, although it is liable to cyclical fluctuations. This is a sign of youth.

Chart Data by YCharts

One can argue that recently Amazon’s profitability has also begun to grow. And this is a sign of maturity:

Chart Data by YCharts

But I do not think so. If we exclude the influence of AWS, over the last two years, the company’s net income growth has been ensured by advertising. This means that Amazon’s profit growth is a side effect of its quantitative growth and does not mean a slowdown in the company’s growth. Just a nice bonus!

Source: my article on SA "More Data On Amazon's Advertising Business"

Another sign of maturity is the growth of debt. But here, Amazon has clearly not reached a critical limit:

Chart Data by YCharts

We can also judge the company’s development phase by its investments. As I have already mentioned, when a company is in the phase of maturity, it is looking for ways of being reborn and makes non-core investments. But in the case of Amazon, I don’t recollect large non-core acquisitions. As a rule, Amazon purchases are associated with logistics, robotics and AI. There is no fuss about the future.

Bottom Line

It turns out that Amazon is still in the phase of its youth, though not early youth. In other words, to some extent it is still a startup, but with $23 bn in the account as cash and cash equivalents. How to evaluate such a company is a good topic for a future article, but one thing is for sure ‒ for such a company the P/E at level 80 is absolutely not critical.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.