Amazon: The Most Clearly Undervalued Company

Summary

• Amazon is one of the companies whose growth has not yet reached its limit and not even entered the plateau phase.
• In terms of comparative valuation, AMZN is undervalued against the market.
• DCF-based Amazon stock price target suggests 30% upside potential. But I think this is not even a basic scenario, but a pessimistic scenario.

Photo by Elijah Nouvelage/Getty Images News via Getty Images

I present my comprehensive Amazon (NASDAQ:AMZN) analysis in light of the results of the last quarter.

#1 Price vs. Growth

First of all, let's assess whether we can statistically state that Amazon's growth has accelerated or slowed down in the last quarter. To do this, let's compare the revenue growth trends of the key segments of the company with and without the results of the last four quarters.

The dynamics of the 'Online Stores' segment showed a qualitative breakthrough. Without taking into account the last four quarters, a near-linear trend was observed here. Now, it has become exponential:

Source: VisualizedAnalytics.com

The 'Third-Party Seller Services' segment - the exponential growth continues:

Source: VisualizedAnalytics.com

The 'Subscription Services' (Amazon Prime) segment - here the acceleration remains, and the result of the last quarter was better than the trend:

Source: VisualizedAnalytics.com

The 'Other' (advertising services) segment has also showed a significant acceleration:

Source: VisualizedAnalytics.com

The growth trend of 'Amazon Web Services' has slowed down, but judging by the results of the last quarter, there is a gradual return to the previous trend:

Source: VisualizedAnalytics.com

Geographically, Amazon's revenue was also significantly better than the trend:

Source: VisualizedAnalytics.com

So, statistically, not subjectively, we should recognize the acceleration of the company's growth in all key segments. In my opinion, this is exactly what is expected from Amazon.

Further. Over the last 10 years, Amazon's capitalization has been in a qualitative linear relationship with its revenue:

Source: VisualizedAnalytics.com

There is also a certain influence of the company's revenue growth rate on its multiples:

Source: VisualizedAnalytics.com

Based on these two relationships and taking into account the influence of the growth of the M2 money stock in the US, it is possible to build another model that allows us to determine the balanced level of the company's capitalization. In addition, this model allows to model the growth of the company's capitalization based on the current expectations of analysts regarding the company's revenue growth in the next four quarters. Here is this model:

Source: VisualizedAnalytics.com

As you can see, firstly, this model indicates that the company's current price is already below the balanced level. And secondly, it assumes a 25% growth in capitalization in the next four quarters.

#2 Comparative Valuation

In the previous block, I modeled Amazon's balanced price based on revenue. What is remarkable is that if we apply the same approach to the comparative valuation of the company using multiples, we will fail. At least I have not been able to find a single revenue-based multiple that would make it possible to successfully compare Amazon to other companies. But the forward P/E (next FY) multiple adjusted by the expected EPS annual growth rate made it possible to find a suitable model:

Source: VisualizedAnalytics.com

As you can see, judging by this multiple, Amazon is significantly undervalued.

#3 Discounted Cash Flow Model

When predicting Amazon's revenue for the next decade, I proceeded from the average expectations of analysts:

Source: Seeking Alpha Pro

When predicting the dynamics of Amazon's operating margin, I also proceeded from analysts' expectations regarding the growth of the company's EPS, and taking into account the gradual increase in the tax rate to 25%. In my opinion, a gradual increase in the operating margin to 8% in the terminal year is a very realistic scenario.

Here is the calculation of the Weighted Average Cost of Capital:

Source: Author

Some explanations:

• In order to calculate the market rate of return, I used values of equity risk premium (4.72%) and the current yield of UST10 as a risk-free rate (1.6%).
• I used the current value of the three-year beta coefficient (0.92). For the terminal year, I used Beta equal to 1.
• To calculate the Cost of Debt, I used the interest expense for 2019 and 2020 divided by the debt value for the same years.

Here is the model itself:

(In high resolution)

Source: Author

The DCF-based target price of Amazon's shares is $4,280, offering 29% upside.

Final thoughts

1. Amazon is one of the companies whose growth has not yet reached its limit and not even entered the plateau phase. In a sense, this is a startup with $73 billion cash.
2. The fact that Amazon remains in the acceleration phase does not mean that its capitalization is constantly undervalued. But in this case, based on the patterns between the company's capitalization and the parameters of its revenue, we can conclude that the company is undervalued.
3. Comparing Amazon to other companies through the prism of expected EPS growth, it must be admitted that the company is much cheaper than the market.
4. DCF model based on average expectations analysts indicate a 30% undervaluation. At the start of the year, a similar model indicated a 20% undervaluation.
5. When you look at Amazon's revenue forecast for the next decade, you realize that the company will face growth problems. But in my opinion, it is better to invest in a company facing growth problems than aging problems.

Analyst’s 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.

Comments

[Brent Ericson]

The stock price has tanked since your article. Your discount rate (WACC) assumes treasury yield of 1.6%. That is not the yield now nor will it be the yield in years to come. Your target price based on DCF is too overvalued in a rising interest rate environment. I would use a WACC of at least 7%.

[jodihn]

@brent_ericson what does that get you for entry price today? Wait for 2,750 again?

[Carlspackler1]

Agree. Bought more near the close one Friday. Way
Oversold and
expect the upward tend to continue once Jeff finishes selling

[User 581032]

AMZN`s operating margin is about 7%. Walmart`s is just under 5%. AMZN trades at a 62 earnings multiple. WMT is about 30. They`re both quite pricey but one much more so.

[Gary J is Rich on AMZN]

@Vincent1966

Which one is that?

I assume the faster grower is worth far more.

[ex institutional listed derivatives analyst]

@Vincent1966 Comparing WMT and AMZN makes no sense. WMT is a slow growing dinosaur. AMZN is a Mega Cap that is growing like a start up but profits like a blue chip. Looking at static data doesn't tell the story. You have to look at YOY numbers as this shows the trend, that's what investors look at.

[Slabstr]

@Vincent1966 does Walmart compete against Microsoft and Google for billions in hosting contracts on its IaaS platform?

[5ofDiamonds]

During 1970-80s, Tobacco and Oil were obvious choices to invest. In 21st century, FAAAMG (FB, Apple, Amazon, Adobe, Microsoft, Google) are the new leaders. Its debatable if one is better off investing in these leaders, than doing a bunch of valuation-analysis to invest in others, to come out a winner as a long term "investor" (vs. trader) @Oleh Kombaiev My 1c.

[Oleh Kombaiev]

@5ofDiamonds This is a very good question that deserves a separate discussion. But in this case, I'm not talking about too long term. Amazon is already undervalued and I think it will grow this year.

[SuperPac]

@5ofDiamonds @Oleh Kombaiev

I am sceptical about the longevity of several over-valued, over-bought, single-product tech-saas names. Many of these are struggling to see a clear path to operating / cash profitability. Many are listed to provide exist to the private investors (who actually make the alpha in these names). Does a retail investor have the wherewithal to analyse these companies? No.

FAAAMG represent years of dominance ahead. They will innovate, invent, acquire and subdue. They have the cash resources, market presence and the political clout (increasingly visible and palpable) necessary. To FAAAMG I would add a few chip names like AMD, nVidia..may be a few others. And equipment makers like ASML Holding.

I agree with the author that AMZN right now is undervalued. Since July the stock has not done much. Have a look at its 50, 100, 200 DMA. AMZN is stuck in a rut right now. It should break out upward at some point.

[Advanced_Tech]

People keep mentioning P/E ratios and market caps but the fact is Amazon price per share is 3300$ and compared to Nvidia Apple Microsoft and other top tech stocks Amazon price per share is expensive very expensive.yes Amazon is a good company and will continue to grow but I have no doubt Apple with a higher market cap will grow faster than Amazon in the coming years.the reason?the price per share is a lot cheaper and for many investors the price tag you pay for 1 share is an important factor.

[calross83]

@BillBoard1133 your right but those investors don’t know what they are doing. Fractional shares have been around for awhile.

[Gary J is Rich on AMZN]

@calross83

It seems to be a difficult concept for many.

[MaxPower912]

@calross83
Not on E*Trade.

[wallstreet368841]

AWS is one of the most undervalued assets Amazon has. Conservatively in 4 to 6 years cloud computing market worldwide should reach 760 billion globally. Amazon now has over 30% of the cloud computing market. Assuming AWS keeps 25% of the cloud computing market AWS in 4 to 6 years could be generating 190 billion in revenue from AWS. If you value AWS at 10 times sales which is extremely conservative. AWS just itself will be worth 1.9 trillion.

[freshcupajoe]

People who say, “Why should Amazon split it’s exactly the same! Fractional shares” have no clue how people think and do. Almost all of what we do as humans is emotional habit based system 1 thinking. Nearly all humans are NOT rational most of the time. Read Charlie Munger or Daniel Khaneman. The psychology of owning whole numbers and larger quantities of things is proven factor in psychological gratification. We are dopamine driven machines most of the time. That fact does not even touch on the extra liquidity and availability you get with a smaller share price from a split, and potential Dow inclusion. Split the stock and this thing is gonna moon beyond 4000

[FognFriction]

Solid article, thanks!

[Oleh Kombaiev]

@FognFriction thanks, will see ...

[DC35]

Undervalued compared to most other ridiculously valued stocks. It's still overvalued though, just not nearly as much.

[yoipitydafool]

Sold all my AMZN stock as its been trading sideways forever. I know its going to shoot up eventually but when. I still have AMZN on FDIS that has 20% AMZN as one of its top holdings.

[ex institutional listed derivatives analyst]

@Oleh Kombaiev great article! I think AMZN is even more undervalued than your analysis as comparing the numbers again historical numbers may not be valid as the high margin service revenue is accelerating. In 5 years AMZN will be the most profitable company on earth reaching 1 trillion in revenues and >100 Billion in profits.

[Oleh Kombaiev]

@ex institutional listed derivatives analyst I don't know how the government will react to the appearance of such a company...

[Gary J is Rich on AMZN]

@Oleh Kombaiev There will be a lot of hearings, conferences and accusations just like now. Amazon just needs to depositing into the right pockets just like now.

[Wolfsbane79]

Is new guy going to be Ballmer or Sataya. That’s the only question anyone should be asking.

[User 6870161]

Reading all of the idiotic comments about share price, I find comfort in the fact that added onto my already sizable AMZN position today. Thanks for the affirmation.

[Advanced_Tech]

3300$ a share is not cheap and not undervalued.Amazon will probably cross 10000$ a share eventually but I personally think Apple with 130$ a share plus dividend is a lot better investment.

[BeenHoldin]

@BillBoard1133 Investing is not about feelings... Apple is, as the facts show, highly overvalued relative to historical valuation/fundamentals. Amazon, on the other hand, is technically undervalued relative to historical valuation/fundamentals.

[User 6870161]

@BillBoard1133 Apple is NOT $130 per share. They keep manipulating the price and increasing float with the silly splits. Look at market cap.

[atmowbray]

@michaelfb68 I mean...it is 130 per share though. I think you’re trying to compare market cap

[Dutchtender]

if this article was sold on amazon it would be available as a subscribe and save.

[cgm]

Jeff Bezos just sold $3 billion of AMZN. That speaks loudly as to valuation.

[User 6870161]

@cgm He needed a new rocket.

[Gary J is Rich on AMZN]

@michaelfb68

Mine still works.

[Investinyourself62]

@michaelfb68 possibly the funniest comment on SA :)

[User 49497333]

I am a fan of Amazon, but the current level is not cheap 😄

[Gary J is Rich on AMZN]

@Kompressor

I am a fan of Amazon, but the current level is cheap 😄

[User 6870161]

@Kompressor Share price has nothing to do with value.

[MaxPower912]

@Kompressor
the forward P/E is 63 and the PEG is 1.7

[Always Coca-Cola]

How about taking out Tesla and, given the law of really large numbers, compaing AMZN vs other Trillion dollar valuation companies only ? Please... and thank you for a fascinating visual perspective ! Kudos !!

[jw5]

Split 30:1 and watch the feeding frenzy happen. Amazon has wonderful consumer brand recognition and a ton of retail investors would jump all over it if the buy in was perceived to be more reasonable.

[wallstreet368841]

@jw5 splits add no underline value to the company. Maybe there's a short-term buying but in the end is still the same company with the same prospects. One thing about a larger stock price is it's harder to Short. Personally I don't know if a split in the grand scheme of things what's best for the company. More traders and more people buying and selling and using options I just don't know. I personally hope they don't split the stock there's nothing keeping the stock from continuing to go up if they execute without a split.

[User 6870161]

@wallstreet368841 Good points, but I'd like to see a 10 for 1 to bring some new blood in.

[vote4weber]

@wallstreet368841 We WANT people to short it! That creates wonderful short squeezes! Of course a share split doesn’t add value, but it will tend to increase the share price! Remember, that’s WHY we invest! This thing shot up to $3600 after hours when the market speculated a share split! Give the market what it wants. It’s recently helped both Apple and Tesla.

[SomeGuy14]

LOL. When your comparison is TSLA et al, everything will look undervalued