I have made it a habit of picking my favorite mega-cap tech stocks over the past few years. Apple (AAPL) did not disappoint at all in 2019; Amazon (NASDAQ:AMZN) wowed in 2020; and Microsoft (MSFT) has performed well above peer average so far in 2021.
While I continue to regard Apple and Microsoft as two of the best stocks to own for the long run (particularly the latter, relative to risk), I think that 2022 will be the year for Amazon to shine brighter.
Below, I list and discuss the main reasons why I think that the e-commerce and cloud leader will probably perform much better than it did during this year of recovery from the worst of the COVID-19 crisis.
I doubt that many analysts and investors would dare make a bearish case on Amazon based on long-term fundamentals. For starters, the company operates very competitively in high-growth areas that range from e-commerce to cloud, and from tech devices to advertising and streaming services. Global digital sales alone, perhaps Amazon's key area of expertise, are forecasted to grow by nearly 30% per year through 2025.
But Amazon is not merely riding the rising tide that lifts all boats. For many years, the Seattle-based company has been the undisputed market leader in US e-commerce (41% is more than twice the market share of the next five players combined) and in cloud platform and infrastructure services (32% share vs. runner-up Azure's 20%).
The better news is that Amazon does not seem content with its market leadership status. The chart below shows how the company has been investing heavily in capex, at a ratio to revenue and to cash flow that has not been this high since the early 2000s. It is not a secret that Amazon does not save money to ensure that it has a long growth runway ahead - something that could come in handy during a period of supply chain challenges.
Speaking of supply chain, this seems to be one of the main reasons why Amazon stock, down nearly 10% from the early July peak (see chart below), seems to be hurting lately. On the labor side, Amazon has had to ramp up hiring (including the addition of "150,000 workers in the US to support Q4 seasonal demand") precisely when labor shortages and wage increases may have hit a pandemic-recovery peak. On the product side, costs have ramped up due to inflationary pressures and transportation challenges, not to mention the need to reroute inventory to sidestep bottlenecks.
In addition to this, Amazon has fallen victim to unsurmountable comps this year. In each of the last three fiscal periods of 2020, online store revenue growth ranged from 37% to 49%, while third-party services saw growth of over 50% in each of those quarters. Against these hefty numbers, the low single digit percentage increase in online sales in Q3 of 2021 looked quite insufficient.
From this short-term perspective, Amazon stock's malaise in the past six months or so is justifiable. According to Yahoo Finance, 2021 EPS estimate has fallen from north of $53 about three months ago to barely $40 now. The sizable 25% decrease in earnings projections coupled with a stock that has only dipped about 5% since Q2 earnings suggest that current-year P/E has even expanded a couple of turns recently. See chart below.
But I think that the issues that Amazon faces now are temporary. First, signs that the supply chain disruptions have started to ease slowly continue to surface. Second, comps should improve again by the second half of next year when third quarter 2022 EPS is projected to jump by nearly 100% YOY. Even heavy labor costs will look less menacing against 2021 comps, which could uplift investor sentiment. Because the stock market tends to look ahead at least a half year or so, AMZN price could start to reflect the upside soon.
Now reach beyond to 2023, for example, and Amazon starts to look very attractively valued once again. Should the company deliver the nearly 50% EPS growth that Wall Street currently expects to see that year, the implied 44 times P/E and less than 1.0 PEG seem at least reasonable. I think that investors who hold AMZN now through at least the end of next year when the stock begins to be valued on a multiple of 2023 financial results are the ones who will capture the potential upside ahead.
My last argument for owning Amazon at the end of 2021 and into the start of 2022 is simple mean reversion. The chart below shows that Amazon has been a laggard among Big Tech stocks this year, and by a wide margin.
Probably not a coincidence, my top pick for the last six months of 2019 had been the second-worst performing name in the first six months of that same year. My top pick for 2020 was the worst FAAMG stock of 2019. Lastly, my favorite Big Tech name in 2021 also failed to stand out in the previous twelve-month period. Up to this point at least, all my top mega-cap picks in the past three years have performed well above the tech sector average.
In the face of rich equity valuations, I like to pay attention to shares of high-quality companies that might be selling at a discount relative to the industry. Therefore, I feel good about holding AMZN at current levels.
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This article was written by
Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.
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Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.
He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.
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On Seeking Alpha, DM Martins Research partners with EPB Macro Research, and has collaborated with Risk Research, Inc.
DM Martins Research also manages a small team of writers and editors who publish content on several TheStreet.com channels, including Apple Maven (thestreet.com/apple) and Wall Street Memes (thestreet.com/memestocks).
Disclosure: I/we have a beneficial long position in the shares of AMZN, AAPL, MSFT either through stock ownership, options, or other derivatives. 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.