Friday, March 30, 2012

Amazon: Steady Growth

Amazon (AMZN) is the world's largest online retailer, with annual sales of $48 billion in 2011. The company is seen as taking share away from traditional retailers, and in so doing it has grown revenue at a rate of about 35% per year for the last three years, suggesting it may be a good long-term buy.

First, Amazon offers investors a lot of downside risk protection thanks to its low beta of 0.72. This means that if the market were to fall, Amazon is likely to fall by 30% less than the market due to its beta! Shares also appear to have found support at the $175 level, suggesting the maximum downside is only about 10%, whereas the upside is infinite!

Second, you can't argue with the stock price's performance. The stock is up 15% in the last month, 400%+ in the last five years, and a whopping 1200%+ in the last ten years. If it does even a fraction of that going forward, shareholders who buy in today will be very happy.

There are, of course, many detractors however. Some argue that the stock's P/E of 150 is high, but after factoring in growth assumptions, it clearly isn't. If Amazon continues to grow its revenues at just a 35% rate for the next seven years, and doubles its operating margins (thanks to a higher percentage of service sales and larger economies of scale), it will have only a single digit P/E, which is absurd for such a fast-growing company!

Worldwide online sales are likely to hit $1 trillion in the next decade. If Amazon can capture just 20% of this market, shareholders should do well. While many argue that Amazon is only concerned about market share at the expense of profit margins, yes Amazon does sell some products at a loss but it makes it up on volume!

Finally, I shop at Amazon whereas I didn't used to. This may seem like anecdotal evidence, but other people I know also shop at Amazon, whereas nobody I know shops at bricks and mortar retailers anymore.

Clearly, Amazon has a lot of upside potential without a lot of downside risk. Investors should get in on the ground floor before this thing really takes off!

April Fools!

If you felt like vomiting after some of the above paragraphs, you might just be a value investor!

Last year's April Fools pick is down almost 50% to date...any predictions for this year's pick?

Disclosure: No position


Anonymous said...

I predict that it's still March.

JohnP said...

I was about to unsubscribe from your blog Saj. Very sneaky, getting it in there a day early.