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Best Time To Buy Amazon?

|About: Amazon.com, Inc. (AMZN)
Summary

Use the current dip in share prices to profit over the long term

Fundamentally stable company

Good financials with amazing growth

Amazon.com,(AMZN) better known as Amazon is an American electronic commerce and cloud computing company that was founded on July 5, 1994. It is currently the largest internet-based retailer by total sales and market capitalization.

 _____________________________Statistics_______________________

Price/Earnings = 182.30

EBIT = 4.376 Billion

Price/Book = 21.35

Forward P/E = 84.84

Price/Free Cash Flow = 45.36

Price/Sales = 3.25

Return on Assets = 3.62%

Return on Equity = 14.18%

Market Cap = 462.68 Billion

% of Insider Ownership = 17.82%

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You’re on Amazon.com looking around for a new vacuum cleaner, now out of all the hundreds of vacuum cleaners you’ve come down to 2 of them. Your first option is one that is really cheap, will probably break in a couple of months and is made using cheap material. Your second option is one that is a little bit more expensive but will last for as you take care it and is made using the high-quality material. Which one would you choose?

Why does AMZN make such a great long term investment?

  • HIGH BARRIER FOR ENTRY 

Barriers to entry are high for potential competitors. Amazon has a dominant market share in the online retail sector. 43% of all online retail sales in the US was made through Amazon in 2016, as the companies market share continues to grow. According to the study made by Slice Intelligence, which analyzed more than 4 million online purchases, Amazon accounted for the majority (53%) of the growth in the US online retail sector. To cut the chase, Amazon's already dominant share of the US online retail market is only increasing. Amazon has also become a household name when it come's to online shopping.

  • AMAZING GROWTH  

Net income was $724 million in the first quarter, or $1.48 per diluted share, compared with net income of $513 million, or $1.07 per diluted share, in first quarter 2016.

Operating cash flow increased 53% to $17.6 billion for the trailing twelve months, compared with $11.6 billion for the trailing twelve months ended March 31, 2016. 

Free cash flow increased to $10.2 billion for the trailing twelve months, compared with $6.7 billion for the trailing twelve months ended March 31, 2016. 

Free cash flow less lease principal repayments increased to $6.2 billion for the trailing twelve months, compared with $3.8 billion for the trailing twelve months ended March 31, 2016.

Free cash flow less finance lease principal repayments and assets acquired under capital leases increased to $3.3 billion for the trailing twelve months, compared with $1.9 billion for the trailing twelve months ended March 31, 2016

Amazon announced fourth-quarter results a few months. For the quarter, the company recorded earnings per share of $1.54, easily surpassing the analysts' estimate by 19 cents. On the revenue front, the company reported strong growth of 22.2% on a year-over-year basis, with sales coming in at $43.70 billion.

Amazon's AWS (Amazon Web Service) continues to perform really well.  In 2016, the revenue generated from the AWS business surged 55%, making up approximately 10% of its overall revenue. What's even more interesting is the operating income from this segment more than doubled, accounting for 74% of the e-commerce giant's operating profits for the year.

Amazon.com Inc's annualized return on invested capital ROIC for the quarter that ended in Mar. 2017 was 37.36%

Projected over 20% revenue growth again in 2017 despite starting from roughly $130 billion in annual sales.

  • GREAT CUSTOMER SATISFACTION

For the second year in a row, Amazon.com ranked #1 in corporate reputation in the 23,000-person Harris Poll

U.S. consumers ranked Amazon.com #1 in the American Customer Satisfaction Index, a 10,000-person poll that measures perceptions of quality and value across retailers nationwide.

U.K. consumers ranked Amazon.co.uk #1 in customer satisfaction for the second consecutive year based on a 10,000-person poll by the Institute of Customer Service

  • INCREASED EFFORTS TO CAPTURE INTERNATIONAL MARKET SHARE (India and the Middle East)

The Indian online retail market is one of the world's fastest growing internet markets, which is pegged to touch $100 billion by 2020. India’s online population is tipped to reach 450 million-465 million people by June 2017, according to a new report published by the Internet and Mobile Association of India, expanding the audience of potential e-commerce customers. Currently, it's a fight between Amazon and Alibaba, but Amazon has been advertising in almost each and every major television channel in India. I had personally experienced Amazon's advertising almost throughout the country during a visit to India, compared to none by Alibaba. Amazon also conducts major deals during big celebrations/occasions in India such as Holi, Diwali, New Year, Christmas, Etc. An Amazon spokesperson said, “For Amazon, India continues to be its highest priority investment. We continue to look at India as a key growth region and are committed to invest aggressively with a long-term horizon, and transform the way India buys and sells.” Amazon is willing to do whatever it takes to capture the hearts consumers in India. The firm is willing to spend more than $2 billion dollars in addition to the $5 billion already committed to e-commerce in India, claimed a source in the company. Amazon.in is the most visited and the fastest growing marketplace in India. "The team has increased Prime selection by 75% since launching the program nine months ago, increased fulfillment capacity for sellers by 26% already this year, announced 18 Indian Original TV series, and just last week introduced a Fire TV Stick optimized for Indian customers with integrated voice search in English and Hindi,” said Jeff Bezos, Amazon founder and CEO. 

Amazon had recently acquired the largest online retailer in the Middle East, Souq.com. This acquisition opens up the Middle East market to Amazon, this was something that Amazon had no control over. This was a build vs buy case. In this particular case, Souq had already built a logistic and courier system, more or less controls the UAE market and also controls a portion of Saudi, Egypt, and Kuwait. So it's a smart move to acquire a market dominator rather than build a reputation from scratch. The online retail market in UAE alone is expected to be valued at $10 billion by 2018.

  • GROWING MEDIA SECTOR

The National Football League (NFL) selected Prime Video as its exclusive partner to deliver a live over-the-top digital stream of Thursday Night Football to tens of millions of Prime members worldwide across devices during the 2017 NFL Season. The Thursday Night Football games will also be available to Prime Video members internationally in over 200 countries and territories.

Amazon Studios’ Original Movies won three Academy Awards including Best Actor (Casey Affleck, Manchester by the Sea), Best Original Screenplay (Kenneth Lonergan, Manchester by the Sea), and Best Foreign Language Film (The Salesman). As written above "The team has increased Prime selection by 75% since launching the program nine months ago, increased fulfillment capacity for sellers by 26% already this year, announced 18 Indian Original TV series, and just last week introduced a Fire TV Stick optimized for Indian customers with integrated voice search in English and Hindi," said Jeff Bezos, Amazon Founder and CEO

  • GROWING AREAS OF RETAIL COVERAGE(Physical Stores/Whole Foods Acquisition)

Over 90% of retail purchases happen in physical stores. With Amazon's purchase of Whole Foods, they are not only investing in brick-and-mortar stores but also securing a spot in the $750 billion grocery market and the perks that come with it. Such as:

Data

One of online retail’s huge advantage over physical stores has been the amount of consumer data it can gather without interrupting the shopping experience. Online data doesn’t necessarily translate very well to physical stores. Example: Amazon’s own brick-and-mortar version of its online bookstore, Amazon Books is the perfect example to my point. The company’s 7 store locations are selected based on how consumers browse online, but visitors to the store described the experience as “not built for people who actually read,” indicating that consumers shop differently online than they do in physical stores. This is a huge disadvantage for Amazon. Although, through the Whole Foods acquisition, they can gather a lot of consumer data which can be very beneficial to the operation and future endeavors of Amazon's businesses. Amazon will also be able to use the consumer data to drive other purchases and to connect the shopping process seamlessly. Let's say a customer buys a lot of ingredients typically used in Mexican cuisine, Amazon might then suggest the user to buy a Mexican cookbook. Another example would be that if a customer watches an Indian cookery show, Amazon could suggest deals on rice or essential Indian ingredients or might create a shopping list for you to pick up on your next visit to Whole Foods.

Retail Foothold

Whole Foods have 400 stores in 42 states across the U.S. If Amazon wants in on the grocery business. They need stores: stores and a lot more are what they will get through the acquisition of Whole Foods. Whole Foods has an existing network of brand partnerships, product distributors, and all the stores are already optimized using individualized buyers that chose products/brands based on regional preference. Another perk of the Whole Foods acquisition is the trained workforce of Whole Foods. Many employees at Whole Foods view the company as a long-term career. This is something different as the industry has high turnover rates. A recent study by ThirdChannel shows that educated employees can increase sales by over 60%. And 90% of consumers report being somewhat or extremely likely to make a purchase with assistance from a knowledgeable associate.

  • TECHNOLOGICAL INNOVATIONS

The past couple of years have shown a growing interest in AI (Artificial Intelligence) and it has turned into one of the hottest growth sectors. Amazon had introduced its first AI home speaker system called Echo which was powered by its cloud-based assistant called Alexa in 2015. Echo did not do really well among consumers in 2015 as it was introduced during a very early stage of AI and consumers did not really appreciate the amount of technology behind it. 2016 however, was a completely different story. Amazon detailed the unit sales of Echo surged nine times on a year-over-year basis and was one of the company's top-selling products during the holiday season. Recently, the company added 4,000 skills to Alexa, bringing its capabilities to over 10,000 skills currently. The company is planning to add more skills to Alexa in the near future.

Although several other major tech companies are also entering this market with similar products, it will be difficult to disrupt Amazon's early lead in this market.

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It’s OVERVALUED!!!!

A company may look expensive at this price, you may even think it's overvalued, but if it's constantly generating amazing returns and revenue (look at "AMAZING GROWTH section") it may not be expensive at all. Don't get me wrong, I'm not saying that it's fundamentally cheap, but I do think

Let's dial back a few years on June 22nd and look at the closing prices for Amazon. 

06/22/17 = 1001.3

06/22/16 = 710.6

06/22/15 = 436.29

It's grown over 229.5% in a matter of 3 years. This was no mistake, their financials keep on growing quarter after quarter, year after year. In terms of growth trajectory, AMZN is a very stable investment with high rewards. In fact, in the past 5 years, the stock price has gone up more than 300%.

____________Conclusion_________________________________________

Amazon rewarded investors with strong returns over the past two years. Moreover, the e-commerce giant looks well poised to benefit in the year ahead based on the optimistic outlook for online sales. Although several other major retailers are also aggressively focusing on this market, it does not look like they will be able to take over Amazon anytime soon.

Apart from this, the company's strong Echo sales suggest the home smart speaker era is just getting started. Currently, the stock trades at a price-earnings (P/E) ratio of 182.30, significantly greater than the industry's average. Although the stock looks overvalued, it will continue growing at a healthy rate. Accordingly, investors should hold the stock to gain massive benefits in the future. An investor should try his/her best to avoid falling prey to random market noise created occasionally. There will be dips and highs for the stock. Unless there is something fundamentally wrong with the company, once again, do not fall prey for market noise and sell your stock because it dipped 0.5%

Catalysts

-Amazon's growth is the major catalyst to this investment and it will cause an increase in the earnings. 

-Their constantly growing market share in the online retail space, as well as their reasonable acquisitions such as Souq and Whole Foods, will be beneficial to the overall market control and will provide Amazon with more data to aid future business ventures. 

-The acquisition of Whole Foods and Souq will also increase potential earnings. 

-AWS (Amazon Web Service) will be a significant incremental contributor to Amazon’s overall value creation achieving an over $14 billion run rate and still growing at 55%.

-Growth of Internet and online retail users

-Continuous amount of innovations by Amazon

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.