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Buy Amazon Stock Today And Retire Rich Tomorrow (NASDAQ:AMZN)


Self confident rich man with beard in striped t-shirt holding fan of dollars and pointing finger at camera with serious expression, easy profit.

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This correction has been glorious for long-term investors who understand one simple fact.

Time Frame (Years)

Total Returns Explained By Fundamentals/Valuations

1 Day 0.01%
1 month 0.25%
3 month 0.75%
6 months 1.5%
1 3%
2 6%
3 23%
4 31%
5 39%
6 47%
7 55%
8 62%
9 70%
10 78%
11+ 90% to 97%

(Sources: DK S&P 500 Valuation And Total Return Potential Tool, JPMorgan, Bank of America, Princeton, RIA)

Stock prices vs earnings

Fidelity

  • over 12 months, luck is 33X as powerful as fundamentals
  • over 11+ years, fundamentals are 11X as powerful as luck
  • over the very long-term fundamentals are 33X as powerful as luck

Time to be greedy on Amazon

YCharts

This correction has been historically normal, healthy, and perfectly sensible given that the bond market is predicting six or seven Fed rate hikes by mid-2023.

Fed meeting probablities

CME Group

But notice how not all tech stocks are being affected equally. Some are barely down at all, while Amazon (AMZN) is in a bear market.

Let me show you the four reasons why I just bought more Amazon, ahead of earnings, and you might want to do the same.

While I can’t predict how the market will react to Amazon’s results, which come out Thursday after the close, I can tell you that anyone who buys Amazon at current prices is likely to feel like a stock market genius in 5+ years.

Or, to put it another way, buy Amazon today and you’ll likely thank me tomorrow.

Reason One: Amazon Is Potentially Poised For A Major Post Earnings Beat Pop

This earnings season we’ve seen most big-cap tech crush expectations and deliver fantastic results. Sometimes the market has reacted with a relative yawn.

And other times with single-day pops as high as 11% in the case of Alphabet (GOOG) (intra-day peak).

Here’s why I took advantage of the tech correction to buy more Amazon ahead of earnings.

Tech stocks correction

FactSet Research Terminal

Amazon’s historical track record on beating cash flow estimates is very strong.

Right now its trading at 17.5X forward cash flow, historically 29% undervalued.

  • 36% growth expected in 2022
  • a year of very easy comps
  • potentially making AMZN a good candidate for pre-earnings buys and post earnings pops

AMZN earnings surprise

Seeking Alpha

  • as Amazon achieves greater economies of scale earnings beats have become far more common
  • and often very large beats
  • EPS, while not the ideal metric to focus on, is what trading algos are scanning in press releases
  • I do not advocate market timing
  • I am saying that AMZN’s current valuation is so low, and expectations are likely modest creating the potential for a strong post-earnings pop
  • In other words, AMZN’s recent correction low might be as low as the stock falls baring a 15% to 20% S&P correction in 2022

Want to know why it’s worth buying Amazon into earnings this year?

Metric 2020 Growth 2021 Growth Consensus 2022 Growth Consensus 2023 Growth Consensus 2024 Growth Consensus 2025 Growth Consensus

2026 Growth Consensus

Sales 36% 21% 17% 18% 11% 13% 12%
EPS 82% -2% 23% 50% 45% 35% 27%
Operating Cash Flow 70% -6% 37% 31% 63% 20% 16%
Free Cash Flow 19% -65% 233% 58% 73% 31% 24%
EBITDA 28% 74% 19% 29% NA NA NA
EBIT (operating income) 53% 5% 36% 49% NA NA NA

(Source: FAST Graphs, FactSet Research)

Because growth is expected to be explosive not just this year, but for the foreseeable future.

So that’s why it might be worth buying some Amazon before earnings.

  • keep some cash in reserve to buy more should it fall after good results, as it has for the last several quarters
  • and also should the broader market roll over again as it did in January

Reason Two: One Of The Highest Quality Companies On Earth

The Dividend King’s overall quality scores are based on a 233 point model that includes:

  • dividend safety

  • balance sheet strength

  • credit ratings

  • credit default swap medium-term bankruptcy risk data

  • short and long-term bankruptcy risk

  • accounting and corporate fraud risk

  • profitability and business model

  • growth consensus estimates

  • cost of capital

  • long-term risk-management scores from MSCI, Morningstar, FactSet, S&P, Reuters’/Refinitiv and Just Capital

  • management quality

  • dividend friendly corporate culture/income dependability

  • long-term total returns (a Ben Graham sign of quality)

  • analyst consensus long-term return potential

It actually includes over 1,000 metrics if you count everything factored in by 12 rating agencies we use to assess fundamental risk.

How do we know that our safety and quality model works well?

During the two worst recessions in 75 years, our safety model predicted 87% of blue-chip dividend cuts during the ultimate baptism by fire for any dividend safety model.

How does AMZN score on one of the world’s most comprehensive and accurate safety models? Just take a look.

AMZN Balance Sheet Safety

Rating Dividend Kings Safety Score (144 Point Safety Model) Approximate Dividend Cut Risk (Average Recession)

Approximate Dividend Cut Risk In Pandemic Level Recession

1 – unsafe 0% to 20% over 4% 16+%
2- below average 21% to 40% over 2% 8% to 16%
3 – average 41% to 60% 2% 4% to 8%
4 – safe 61% to 80% 1% 2% to 4%
5- very safe 81% to 100% 0.5% 1% to 2%
AMZN 100% NA NA
Risk Rating Medium-Risk (53rd percentile risk management consensus) AA stable 0.51% 30-year bankruptcy risk

20% OR LESS Max Risk Cap Recommendation (Individual Companies)

Long-Term Dependability

Company DK Long-Term Dependability Score Interpretation Points
Non-Dependable Companies 21% or below Poor Dependability 1
Low Dependability Companies 22% to 60% Below-Average Dependability 2
S&P 500/Industry Average 61% (58% to 70% range) Average Dependability 3
Above-Average 71% to 80% Very Dependable 4
Very Good 81% or higher Exceptional Dependability 5
AMZN 85% Exceptional Dependability 5

Overall Quality

AMZN Final Score Rating
Safety 101% 5/5 very safe
Business Model 80% 3/3 wide moat
Dependability 85% 5/5 exceptional
Total 93% 13/13 Ultra SWAN
Risk Rating

2/3 Medium-Risk

20% OR LESS Max Risk Cap Rec (Speculative)

5% Margin of Safety For A Potentially Good Buy

AMZN: The 7th Highest Quality Master List Company (Out of 510) = 99th Percentile

The DK 500 Master List includes the world’s highest quality companies including:

  • All dividend champions

  • All dividend aristocrats

  • All dividend kings

  • All global aristocrats (such as BTI, ENB, and NVS)

  • All 13/13 Ultra Swans (as close to perfect quality as exists on Wall Street)

  • 46 of the world’s best growth stocks (on its way to 50)

AMZN’s 93% quality score means its similar in quality to such blue-chips as

  • Microsoft (MSFT)
  • Adobe (ADBE)
  • Stanley Black & Decker (SWK) – dividend king
  • T. Rowe Price (TROW) – dividend aristocrat
  • Lowe’s (LOW) – dividend king
  • Alphabet (GOOG)
  • Novartis (NVS) – global aristocrat
  • Unilever (UL) – global aristocrat
  • Johnson & Johnson (JNJ) – dividend king

Even among the highest quality companies on earth, AMZN is higher quality than 99% of them.

Why is Amazon such a quality powerhouse?

AMZN Credit Ratings

Rating Agency Credit Rating 30-Year Default/Bankruptcy Risk Chance of Losing 100% Of Your Investment 1 In
S&P AA stable 0.51% 196.1
Fitch AA- stable 0.55% 181.8
Moody’s A1 (A+ equivalent) stable 0.60% 166.7
Consensus AA- stable 0.55% 180.7

(Sources: S&P, Moody’s, Fitch)

How about an AA-credit rating which means an approximate 1 in 181 chance of losing all your money in the next 30 years?

AMZN Leverage Consensus Forecast

Year Debt/EBITDA Net Debt/EBITDA (3.0 Or Less Safe According To Credit Rating Agencies)

Interest Coverage (8+ Safe)

2020 0.56 -0.09 13.90
2021 0.72 -0.33 13.51
2022 0.60 -0.43 15.57
2023 0.44 -0.68 23.60
2024 0.36 -1.26 38.77
2025 0.29 -1.43 48.22
2026 0.24 -1.63 60.31
Annualized Change -12.89% 62.50% 27.71%

(Source: FactSet Research Terminal)

AMZN has a fortress balance sheet that keeps getting stronger over time.

AMZN is potentially on track to become the 3rd AAA-rated company in America (JNJ and MSFT already have one).

AMZN Balance Sheet Consensus Forecast

Year Total Debt (Millions) Cash Net Debt (Millions) Interest Cost (Millions) EBITDA (Millions) Operating Income (Millions)
2020 $31,816 $42,122 -$5,079 $1,647 $57,284 $22,899
2021 $49,555 $71,112 -$22,465 $1,786 $68,972 $24,123
2022 $48,617 $94,061 -$34,796 $2,020 $81,278 $31,451
2023 $47,117 $141,412 -$72,321 $2,096 $106,599 $49,471
2024 $49,190 $236,996 -$172,669 $1,849 $136,643 $71,686
2025 $48,774 $350,159 -$241,801 $1,951 $168,551 $94,082
2026 $48,774 $491,147 -$328,134 $2,001 $201,002 $120,686
Annualized Growth 7.38% 49.74% 141.47% 3.30% 23.27% 31.92%

(Source: FactSet Research Terminal)

By 2026, AMZN is expected to have almost $500 billion in cash and $328 billion in net cash.

  • Apple’s (AAPL) peak net cash position was $200 billion and its cash position never rose above $250 billion
  • If AMZN grows as expected, buybacks and dividends become a mathematical necessity within a few years

AMZN Bond Profile

  • $30 billion more cash than debt
  • almost $90 billion in liquidity
  • well staggered bond maturities
  • almost all unsecured bonds (maximum financial flexibility)
  • the bond market is so confident in AMZN’s growth strategy its willing to lend to it for 39 years at 3.2%

AMZN Credit Default SWAPs: The Bond Market’s Real-Time Fundamental Risk Assessment

AMZN Credit Default SWAPs

FactSet Research Terminal

Credit default swaps are insurance policies bond investors take out against defaults.

  • they represent real-time fundamental risk-assessments from the “smart money” on Wall Street

AMZN’s CDS spreads have remained relatively stable even as the price has plunged in recent weeks.

  • analysts, rating agencies, and the bond market all agree that AMZN’s thesis remains intact
  • the price plunge was not justified by fundamentals

AMZN Profitability: Wall Street’s Favorite Quality Proxy

AMZN Profitability

GuruFocus Premium

Amazon’s profitability is historically in the top 20% of its peers, despite its famous love of huge growth spending.

AMZN Trailing 12-Month Profitability Vs Peers

Metric Industry Percentile Major Cyclical Retailers More Profitable Than AMZN (Out Of 1,088)
Operating Margin 61.99 NA
Net Margin 69.03 337
Return On Equity 83.73 177
Return On Assets 77.46 245
Return On Capital 62.96 403
Average 71.03 315

(Source: GuruFocus Premium)

AMZN’s profitability has fallen a bit in the last year due to aggressive growth spending (and pandemic costs).

Amazon - wide and stable moat

YCharts

Industry-leading profitability that’s stable over 20+ years confirms AMZN’s wide and stable moat.

AMZN Profit Margin Consensus Forecast

Year FCF Margin EBITDA Margin EBIT (Operating) Margin Net Margin Return On Capital Expansion

Return On Capital Forecast

2020 8.0% 14.8% 5.9% 5.5% 2.53
2021 2.7% 14.7% 5.1% 4.5% TTM ROC 19.91%
2022 6.6% 14.8% 5.7% 4.7% Latest ROC 10.23%
2023 8.9% 16.5% 7.7% 6.4% 2026 ROC 50.44%
2024 10.2% 18.7% 9.8% 8.0% 2026 ROC 25.92%
2025 11.9% 20.4% 11.4% 9.6% Average 38.18%
2026 16.1% 21.6% 13.0% 10.9% Industry Median 11.23%
Annualized Growth 12.23% 6.49% 13.96% 12.00% AMZN/Peers 3.40
Vs S&P 2.62

(Source: FactSet Research Terminal)

AMZN’s margins are expected to grow at very impressive rates, up to 5X for FCF margins by 2026.

Its returns on capital are expected to rise to 3.4X its industry peers, and almost 3X that of the S&P 500, while delivering 3X faster growth.

  • return on capital is pre-tax profit/operating capital (the money it takes to run the business)
  • Joel Greenblatt’s gold standard for profitability and moatiness

And this expected margin growth, some of the strongest on Wall Street, is despite growth spending that has to be seen to be believed.

AMZN Growth Spending Consensus Forecast

Year SG&A (Selling, General, Administrative) R&D Capex Total Growth Spending Sales Growth Spending/Sales
2020 $28,677 $37,677 $35,046 $101,400 $386,064 26.27%
2021 $38,687 $49,995 $53,894 $142,576 $470,337 30.31%
2022 $43,880 $62,078 $54,009 $159,967 $550,982 29.03%
2023 $49,935 $70,589 $59,913 $180,437 $645,711 27.94%
2024 $54,615 $78,742 $63,877 $197,234 $731,227 26.97%
2025 $61,402 $81,404 $58,053 $200,859 $825,889 24.32%
2026 $67,349 $89,277 $60,246 $216,872 $928,778 23.35%
Annualized Growth 15.29% 15.46% 9.45% 13.51% 15.76% -1.94%

(Source: FactSet Research Terminal)

  • for context the US government spends $140 billion on R&D each year
  • Amazon’s R&D budget could eventually surpass that of the US government’s
  • Amazon’s growth spending from 2020 through 2026 is estimated at $1.2 trillion
  • equal to the 10-year infrastructure bill Congress passed in 2021

Amazon over the next 10 years could spend more on R&D and growth than the US government.

  • all while margins continue moving higher
  • and the bottom line grows at close to 30%

And that brings us to the biggest reason that Amazon is my top priority blue-chip for this and all future corrections.

Reason Three: One of The Greatest Growth Stories Of All Time

Amazon is generating revenues that are larger than the economies of most countries.

AMZN Medium-Term Growth Consensus Forecast

Year Sales Free Cash Flow EBITDA EBIT (Operating Income) Net Income
2020 $386,064 $31,018 $57,284 $22,899 $21,331
2021 $470,337 $12,524 $68,972 $24,123 $21,092
2022 $550,982 $36,351 $81,278 $31,451 $26,033
2023 $645,711 $57,246 $106,599 $49,471 $41,356
2024 $731,227 $74,317 $136,643 $71,686 $58,341
2025 $825,889 $98,481 $168,551 $94,082 $78,893
2026 $928,778 $149,080 $201,002 $120,686 $101,285
Annualized Growth 15.76% 29.91% 23.27% 31.92% 29.64%

(Source: FactSet Research Terminal)

And yet it’s still growing at 16% on the top line and its bottom line is growing about twice as fast.

AMZN Dividend/Buyback Potential Consensus Forecast

Year Dividend Consensus FCF/Share Consensus Payout Ratio Retained (Post-Dividend) Cash Flow Buyback Potential Debt Repayment Potential
2021 $0.00 $26.66 0.0% $13,517 0.93% 27.3%
2022 $0.00 $62.06 0.0% $31,464 2.15% 63.5%
2023 $0.00 $97.67 0.0% $49,519 3.39% 101.9%
2024 $0.00 $168.92 0.0% $85,642 5.86% 181.8%
2025 $0.00 $220.83 0.0% $111,961 7.67% 227.6%
2026 $0.00 $272.96 0.0% $138,391 9.48% 283.7%
Total 2021 Through 2026 $0.00 $849.10 0.0% $430,493.70 29.48% 868.72%
Annualized Rate NA 78.04% NA 78.04% 78.04% 78.04%

(Source: FactSet Research Terminal)

No dividends or buybacks are expected for the foreseeable future but AMZN’s retained cash flows are so large, and its annual FCFs are growing so quickly that eventually buybacks and dividends become a mathematical certainty if AMZN grows as expected.

  • capital return program will put even Apple’s to shame

And now take a look at the long-term outlook on Amazon.

AMZN Long-Term Growth Outlook

  • 24.9% CAGR median growth consensus from all 52 analysts covering Amazon
  • 24.9% to 34.7% CAGR growth consensus range
  • smoothing for outliers historical margin of error is 15% to the downside and 45% to the upside
  • 21% to 51% historical margin-of-error adjusted growth consensus range
  • approximately 70% statistical chance that AMZN grows operating cash flow at 21% to 51% CAGR over the next five years

Amazon’s hyper-growth is expected to continue for the foreseeable future, just as it has for the last two decades.

Ok, so those are some impressive analyst forecasts, but what is going to actually allow Amazon to grow at such a torrid rate when it’s already so massive?

Amazon’s Growth Drivers: AWS And Advertising

The key to Amazon converting 16% sales growth into 25% bottom-line growth is that its two fastest-growing businesses are also its two most profitable.

Amazon Web Services Growth And Margin Consensus Forecast

Year AWS Consensus Sales AWS Consensus Operating Income AWS Consensus EBITDA AWS Consensus Operating Margin AWS Consensus EBITDA Margin
2020 $45,370 $13,531 $22,954 29.82% 50.59%
2021 $61,667 $18,178 $31,680 29.48% 51.37%
2022 $79,837 $23,326 $41,664 29.22% 52.19%
2023 $99,698 $29,185 $54,300 29.27% 54.46%
2024 $123,162 NA $65,161 NA 52.91%
2025 $129,159 NA $76,889 NA 59.53%
2026 $145,950 NA NA NA NA
Annualized Growth 21.50% 29.20% 27.35% -0.62% 3.31%

(Source: FactSet Research Terminal)

AWS is growing sales at 22% and margin expansion is expected to convert that into nearly 30% cash flow growth.

“The global cloud computing market size is expected to reach USD 1,251.09 billion by 2028, registering a CAGR of 19.1% over the forecast period. This growth can be attributed to several factors, including digital transformation across various industries, a surge in internet penetration, and big data consumption in various verticals. Increasing adoption of 5G, Internet of Things (IOT), and Artificial Intelligence (AI) is expected to further support the growth of the market for cloud computing.” – Yahoo Finance

Cloud computing is a massive and fast-growing industry, that’s growing at 19%. Guess who is the global king of cloud computing?

Amazon’s cloud market share has been stable at 32% for four years. It’s the largest cloud computing company on earth.

Margins on AWS are expected to remain stable or improve slightly despite strong competition from MSFT and GOOG.

But as great as AWS is, it pales in comparison to Amazon’s advertising business.

Advertising Consensus Forecast

Year Advertising Revenue Total Sales Advertising As % Of Sales Operating Income (45% Operating Margin)

Potential Market Value ($ Billions)

2020 $15,730 $386,064 4.07% $7,079 $325,611.00
2021 $28,132 $470,337 5.98% $12,659 $582,332.40
2022 $37,347 $550,982 6.78% $16,806 $773,082.90
2023 $48,778 $645,711 7.55% $21,950 $1,009,704.60
2024 NA $731,227 NA NA NA
2025 NA $825,889 NA NA NA
2026 NA $928,778 NA NA NA
Annualized Growth 45.82% 15.76% 22.85% 45.82% 45.82%

(Source: FactSet Research Terminal)

Piper Jaffrey estimates 75% operating margins for advertising, but even using the low end of the industry norm (45%) we can see that Amazon’s advertising business could be worth $1 trillion by 2023.

What AWS Could Be Worth

Year Potential Market Value ($ Billions)
2020 $392,399.00
2021 $527,162.00
2022 $676,454.00
2023 $846,365.00
Annualized Growth 29.2%

(Source: FactSet Research Terminal)

AWS + Advertising could be worth almost $2 trillion by the end of 2023.

  • AMZN’s current market cap is under $1.5 trillion
  • the market is currently valuing Amazon’s retail business at -$300 billion

Is Amazons’ retail business, which is currently 71% of sales, worth -$300 billion? Almost certainly not.

Amazon is rapidly gaining market share in advertising and here’s why.

  • a study found that Amazon’s ads have 70% higher conversion rates and 65% lower costs per click
  • another study concluded that AMZN’s advertising is about 4X more profitable than GOOG’s

Basically, AMZN knows shoppers better than anyone on earth and is able to market to them most effectively.

US triopoly digital ad revenue share

eMarketer

Amazon is the #3 digital ad company on earth and that market share is expected to keep climbing over time.

Attractive growth opportunities in the digital transformation market

Digital Transformation Market

The online ad market is already almost $500 billion size and is expected to double by 2025.

  • Amazon advertising is growing 3X faster than the industry as a whole

Let me repeat that. Amazon is rapidly gaining market share in a future $1 trillion addressable market that’s growing at 16% per year.

AWS has 30% operating margins, Advertising potentially as much as 75%.

  • Amazon’s fastest-growing businesses are also its more lucrative
  • driving very strong potential margin expansion

A Global Growth Powerhouse

Almost 40% of sales are from outside North America.

  • operating income from international sales are expected to grow at 69% through 2023
  • vs 27% for North American operating income

In other words, Amazon has many worlds left to conquer and one of the longest growth runways of any Ultra SWAN on Wall Street.

Amazon Prime paying members

Statista

  • Amazon Prime had 150 million US members in 2020
  • and 50 million global members
  • Prime is expected to soon surpass Netflix as the #1 streaming service on earth

Amazon prime members in the US

Quartz

AMZN Prime members spend nearly 4X more…



Read More: Buy Amazon Stock Today And Retire Rich Tomorrow (NASDAQ:AMZN)

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