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AMAZON STOCK ANALYSIS (AMZN): Why It's Undervalued Now! Large Economic Moat! - YouTube
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Hi everyone, this is Victor here.
In this video, I’m going to analyze Amazon stock
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to see if it is greatly undervalued now.
At the time of making this video,
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Nasdaq is in a large correction. Nasdaq
has dropped 22% from its most recent peak.
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Amazon stock has dropped 24% from its most recent
peak. Amazon is still one of the best-performing
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stocks in the past 5 years, outperforming the
Nasdaq by a large margin during this period.
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Obviously, past performance does not
guarantee future results, so in this video,
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I’m going to analyze Amazon stock to see
if it is still an outstanding business to
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invest in for the long term.
I will cover these topics:
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Amazon’s 20-for-1 stock split and $10
billion share buyback. What you need to know.
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Amazon’s business overview and revenue guidance.
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Amazon’s large economic moat
and long-term prospects.
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Amazon’s two main risks you should know.
Amazon stock Valuation. You will learn about how
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to calculate Amazon’s intrinsic value per share.
And will I buy Amazon stock?
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If you like this video, make sure to hit the like
button, subscribe and turn on the notification
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button. I will continue to make many excellent
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The link is in the video description.
Take a look. Let’s start.
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Recently, Amazon announced that its board of
directors has approved a 20-for-1 stock split.
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The company also announced it is planning to buy
back up to $10 billion worth of Amazon shares.
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So, what does this mean to retail investors?
Let's say you own one Amazon share, a 20-for-1
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stock split means you will receive 19 additional
Amazon shares for each Amazon share you own.
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If Amazon is traded at $2,900/share,
Amazon would change from $2,900/share to
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$145/share after the 20-for-1 stock split.
A 20-for-1 stock split will benefit retail
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investors because it will make each Amazon
share more affordable and cheaper to buy.
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The stock split will also increase Amazon
stock’s liquidity in the market, so it will be
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easier for investors to buy and sell Amazon stock.
Here’s the important part about the stock split.
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The 20-for-1 stock split does not change
Amazon’s business fundamentals. The stock
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split does not change Amazon's intrinsic business
value. Amazon’s business is still the same.
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Amazon also announced the company will buy
back up to $10 billion worth of shares.
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According to Reuters: “The stock buyback
replaces the previous $5 billion stock
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repurchase authorized by Amazon's
board in 2016, under which the company
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had repurchased $2.12 billion of its shares.”
Before investing in any stocks, I believe it is
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very important to understand the business first.
Amazon has many businesses. Its main businesses
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are Amazon online stores that sell both Amazon
first-party products and third-party sellers’
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products, Fulfillment by Amazon FBA services
for third-party sellers, physical stores such
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as Whole Foods, subscription services such
as Amazon Prime Membership and Prime Video,
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advertising services for third-party
sellers, and Amazon Web Services AWS.
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AWS is the largest Infrastructure-as-a-Service
(IaaS) and Platform-as-a-Service (PaaS)
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cloud provider in the world.
The important question is this.
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How profitable are Amazon’s businesses?
This is from the most recent
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Q4 2021 earnings release.
If you look at this here, Amazon
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has separated its total sales into different
businesses: Online stores, physical stores,
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third-party seller services, subscription
services, advertising services and AWS.
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Online stores, third-party seller services
and AWS earn the most revenues for Amazon.
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Even though Amazon earns the most revenues
from online stores and third-party services,
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AWS is much more profitable than
all other Amazon businesses.
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For example, in fiscal 2021, Amazon’s
total operating income was $24.9 billion.
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AWS earned the largest operating
income of $18.5 billion. In comparison,
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the North America business segment had
an operating income of $7.3 billion,
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and its international business segment had an
operating loss of $924 million. This shows most
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of Amazon’s total operating income is from AWS.
AWS also has a much higher growth rate than
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Amazon’s online stores, third-party
seller services and all other services.
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For example, in the recent quarter, AWS’ net
sales grew 40% year-over-year. In comparison,
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Amazon’s online stores’ net sales decreased
1% year-over-year and third-party seller
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services’ net sales grew 11% year-over-year.
Amazon also earns revenues from subscription
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services such as Prime Membership and advertising
services from selling ads to third-party sellers.
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Prime membership is the biggest revenue
contributor for subscription services.
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At the time of making this video, Amazon
already has over 200 million Prime members
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around the world. Amazon’s Prime membership
has been growing very consistently every year
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for many years already. Most people sign
up for Amazon Prime because they always
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shop on Amazon and because they like Amazon’s
free same-day and next-day shipping service.
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I will talk more about this later.
According to MorningStar, you can see
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Amazon had very consistent revenue growth, very
consistent operating income growth and consistent
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operating cash flow growth in the past 10 years.
However, Amazon does not have very consistent
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free cash flow yet because Amazon has very
large capital expenditures CAPEX each year.
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Amazon still needs to reinvest a large amount of
capital into AWS, fulfillment centers, warehouses,
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shipping services and logistics each year.
In recent quarters, Amazon had been spending a lot
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more capital to expand its IT infrastructures,
warehouses, transportation capacity,
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logistics and AWS. This is why Amazon had a
large negative free cash flow in fiscal 2021.
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Management gave this revenue guidance
for the next Q1 2022 quarter.
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“Net sales are expected to be between $112.0
billion and $117.0 billion, or to grow between 3%
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and 8% compared with first quarter 2021.”
“Operating income is expected to be between
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$3.0 billion and $6.0 billion, compared
with $8.9 billion in first quarter 2021.”
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This revenue guidance shows Amazon’s
revenue growth is likely decelerating,
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and the company’s operating income will likely be
lower in 2022 because of higher operating costs,
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higher inflation rate, higher salaries
for employees, supply chain issues,
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and large investments in fulfillment centers,
logistics, IT infrastructures and AWS.
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Another thing I should mention is this.
In the recent Q4 quarter, Amazon beat earnings
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estimates by a large margin because Amazon
reported a one-time $11.8 billion valuation
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gain from Rivian when Rivian went public.
In my opinion, this large earnings beat is very
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misleading because the $11.8 billion valuation
gain from Rivian stock is only a one-time time.
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This is an unrealized gain because based on
what I know, Amazon likely did not sell Rivian
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stock. This $11.8 billion valuation gain is not
real income from Amazon’s operating businesses.
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Here is the problem in the upcoming quarters.
Amazon will likely need to report a large
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valuation loss in Rivian stock in the upcoming
quarters even if Amazon does not sell Rivian
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stock because Rivian stock has dropped around
80% from the most recent peak since its IPO.
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Let’s talk about Amazon’s large economic
moat and long-term growth prospects.
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I believe Amazon’s most important business
AWS has a very large economic moat and
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excellent long-term growth prospects.
This is from the most recent Q4 earnings
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call. It shows AWS has excellent long-term
growth prospects and a high growth rate.
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Management said:
“AWS saw a continuation of the strong
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usage and revenue growth we’ve seen throughout
2021. AWS added more revenue year-over-year than
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any quarter in its history, and it’s now a
$71 billion annualized run rate business,
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up from $51 billion run rate one year ago.”
“In the past quarter alone, NASDAQ announced
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a multiyear partnership to migrate North America
markets to AWS, including their matching engine.
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Best Buy selected AWS as its preferred cloud
provider for cloud infrastructure services.
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Meta, the parent company of Facebook,
Instagram and WhatsApp selected AWS as its
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long-term strategic cloud provider to accelerate
artificial intelligence research and development.”
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“But where we sit now, AWS has 84 availability
zones in 26 regions around the world right now.
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And just in terms of the forward-looking
road map, we have announced to launch
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24 more zones in 8 more regions, and those
will be here in the next couple of years.”
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According to Gartner, Amazon Web
Services AWS is the market leader
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in Infrastructure as a service (IaaS) and
integrated platform as a service (PaaS).
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AWS has been the market leader
in cloud-computing services,
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especially IaaS and PaaS, for many years already.
For example, according to Synergy Research Group,
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you can see Amazon’s AWS market
share has been very constant at 32%
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to 33% for many quarters. AWS’ two biggest
competitors are Microsoft Azure and Google Cloud.
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This is from Canalys.
You can see that worldwide
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spending on cloud infrastructure services has been
growing very consistently in recent years because
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many large enterprises around the world have
been migrating their IT infrastructures from
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traditional on-premise data centers to the cloud.
The pandemic has accelerated many businesses’
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migration from on-premise data centers to the
cloud because cloud computing is much cheaper,
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much more scalable, and oftentimes,
much more reliable and secured than the
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traditional on-premise data centers.
Also, e-commerce, online gaming,
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video streaming, video conferencing, working
from home, and now the metaverse have pushed
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many companies around the world to invest
much more in cloud computing going forward.
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Since many large businesses are moving to the
cloud, most of them would choose the largest
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and most well-established cloud providers.
And the best cloud providers are Amazon AWS,
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Microsoft Azure and Google Cloud.
In my opinion, it is almost impossible
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for other companies to compete with Amazon
AWS, Microsoft Azure and Google Cloud because
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these three largest cloud providers are
already far ahead and well-established
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in Infrastructure as a service (IaaS) and
integrated platform as a service (PaaS).
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The closest competitor is Alibaba Cloud
but Alibaba Cloud mainly operates in China.
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Going forward, I expect AWS will continue to be
the biggest profit driver for Amazon for many
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years because AWS is already the dominant leader
in Infrastructure as a service and integrated
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platform as a service. AWS is also much more
profitable than all other Amazon businesses.
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I believe Amazon’s online stores business also has
a very large economic moat, but its revenue growth
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should be much lower than AWS’ revenue growth. The
main reason is that Amazon’s e-commerce business
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is much more mature in North America.
Management expects Amazon’s total net
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sales “to grow between $112.0 billion
and $117.0 billion or to grow between
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3% and 8% compared with first quarter 2021.”
Amazon’s online stores and third-party
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seller services contribute the
most sales compared to AWS.
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This 3 to 8% expected net sales growth shows
Amazon’s e-commerce business, including both
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online stores and third-party seller services,
will likely have a much lower revenue growth
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rate going forward at least in the short term.
In the short term, I believe Amazon’s operating
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income will likely drop in 2022 compared to
2021 because of the current high inflation rate,
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higher salary costs, higher shipping costs,
supply chain issues around the world, and much
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higher investments in fulfillment centers,
Amazon logistics and most importantly AWS.
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This is why management gave a much lower
operating income guidance even though
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Amazon’s total net sales are expected to grow
between 3% and 8% in the upcoming quarter.
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Management said: “Operating income is expected
to be between $3.0 billion and $6.0 billion,
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compared with $8.9 billion in first quarter 2021.”
In the long term, I expect Amazon’s e-commerce
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business will continue to grow
for many years because consumers
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will continue to shop online using Amazon.
This is from e-marketer research. E-marketer
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forecasts that the worldwide retail e-commerce
sales will continue to grow between now and 2025.
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You can see the red line here showing the expected
e-commerce sales growth rate between now and 2025.
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Amazon’s biggest economic moat is this.
Amazon’s online store is already the
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largest online retailer in North America and in
many countries around the world. Like Google,
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Amazon is essentially an online search engine
for consumers to search the products and digital
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content they want to buy. In North America,
most people tend to use Amazon first before
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using Walmart eBay, or other online retailers
and marketplaces because Amazon usually has
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the largest selection of products at very
reasonable prices. More importantly, Amazon
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has very fast shipping services, such as same-day
shipping, one-day shipping or two-day shipping.
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If you are an Amazon Prime member, you will have
free same-day, one-day or two-day delivery on
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millions of products. Other benefits include
Prime Video, Prime Music, and discounts on
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Amazon Prime Day every year. This is why Prime
members have been growing consistently for many
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years. At the time of making this video, there are
over 200 million Prime members around the world.
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In my opinion, it will be very hard for other
competitors to copy Amazon’s business model,
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large selection of products at very reasonable
prices, fulfillment centers, warehouses,
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logistics, Prime Membership, and same-day
or next-day shipping services. This is why
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I believe Amazon’s e-commerce business and Prime
Membership will continue to grow for many years.
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Let’s talk about Amazon’s biggest risks.
I believe Amazon’s first biggest short-term
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risk is higher operating costs going
forward that will reduce Amazon’s
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operating income and free cash flow growth.
For example, in the most recent Q4 quarter,
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Amazon’s North America business segment had an
operating loss of $206 million, and it was down
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107% year-over-year. Amazon’s international market
business segment also had an operating loss of
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$1.6 billion, and it was down 549% year-over-year.
Only AWS had an operating income of $5.3 billion,
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and it grew 48% year-over-year. This means
all of Amazon’s operating income came
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from AWS in the most recent Q4 quarter.
Amazon’s operating costs have increased
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a lot in recent quarters because of supply
chain issues, much higher inflation in the
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US and in many countries around the world,
higher salary costs, higher shipping costs,
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higher inventory costs, labor shortages, and much
higher capital expenditures to invest in AWS, IT
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infrastructures, fulfillment centers, warehouses,
shipping, and Amazon Logistics around the world.
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Management said this in the recent earnings call:
“As we mentioned in the last earnings call,
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we did see more than $4 billion in costs from
inflationary pressures and loss productivity
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and disruption in our operations. The
inflation primarily relates to wage
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increases and incentives in our operations
as well as higher pricing from third-party
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carriers supporting our fulfillment network.”
“Productivity across our fulfillment network
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currently is being affected by global supply
chain constraints and constrained labor markets,
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which increase payroll costs and make it difficult
to hire, train, and deploy a sufficient number
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of people to operate our fulfillment network.”
Going forward, Amazon may have lower operating
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income in 2022 and even 2023 compared to
2021 because of higher operating costs,
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higher inflation rate and supply
chain issues around the world.
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I believe Amazon’s second biggest
risk is anti-trust issues.
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For example, according to CNBC, the DC Attorney
General is filing a complaint against Amazon
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for enforcing policies that prevent Amazon
third-party sellers from selling products at
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a lower price at other competing marketplaces.
Also, according to CNBC, the DC Attorney General
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is alleging that “Amazon’s “Minimum Margin
Agreement” with first-party sellers has the
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“practical effect” of incentivizing
those wholesalers to raise their
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prices for marketplaces outside of Amazon.”
“That’s because those agreements require that
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the wholesaler guarantee Amazon a minimum profit,
meaning the seller must make up the difference
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if it doesn’t reach that margin. Racine alleges
first-party sellers may be inclined to raise their
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prices elsewhere “to ensure that Amazon does not
drop its price based on lower prices elsewhere.”
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“These agreements reduce other
online marketplaces’ ability to
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compete with Amazon by offering lower prices
to consumers,” according to the complaint,
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which goes on to say that the practice
“results in reduced competition among online
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marketplaces and higher prices to consumers.”
In my opinion, Amazon is a near-monopoly in
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the e-commerce market in North America. If
these Antitrust regulators find Amazon is
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practicing anti-competitive behaviors, Amazon
will likely receive large fines going forward,
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similar to Google and Microsoft in the past.
Let’s talk about Amazon stock valuation.
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I always use this intrinsic value calculator
to calculate a stock’s fair intrinsic value,
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so I will know whether the stock is
undervalued, fairly valued or overvalued now.
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If you want this calculator, you can download
it in my Patreon Blog in the video description.
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We are not using a discounted cash flow
DCF model to value Amazon’s intrinsic
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value because Amazon does not have
consistent free cash flow growth yet.
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Amazon has many businesses, so we will
use the Sum-of-the-Parts valuation model
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to calculate Amazon’s intrinsic value.
Amazon’s major businesses are Amazon’s
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online stores and physical stores, Amazon’s
third-party seller services, subscription
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services, Advertising services, and AWS.
For the first businesses, Amazon’s online stores
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and physical stores, I have added their trailing
12 months of revenue, which is $239 billion.
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The two comparable companies are Walmart
and JD.com. The average Price-to-Sales PS
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ratio is 0.79. If we multiply $239 billion of
revenue here by the average PS ratio of 0.79,
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the combined fair value is $189 billion.
For Amazon’s third-party seller services,
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the trailing 12 months of revenue is $103
billion. The two comparable companies are
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eBay and Alibaba. The average Price-to-Sales
PS ratio is 6.59. If we multiply $103 billion
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of revenue here by the average PS ratio
of 6.59, the fair value is $681 billion.
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For Amazon’s subscription services, the trailing
12 months of revenue is $32 billion. The two
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comparable companies are Netflix and Spotify.
The average Price-to-Sales PS ratio is 5.70.
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If we multiply $32 billion of revenue
here by the average PS ratio of 5.70,
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the fair value is $181 billion.
For Amazon’s advertising services,
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the trailing 12 months of revenue is $31
billion. The two comparable companies are
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Alphabet and Facebook. The average Price-to-Sales
PS ratio is 8.55. If we multiply $31 billion
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of revenue here by the average PS ratio of
8.55, the fair value is around $266 billion.
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For Amazon’s AWS business, the trailing 12
months of revenue is $62 billion. The two
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comparable companies are Microsoft and Oracle.
The average Price-to-Sales PS ratio is 7.31.
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If we multiply $62 billion of revenue
here by the average PS ratio of 7.31,
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the fair value is around $454 billion.
At the time of making this video,
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Amazon has $96 billion of cash
equivalents and marketable securities
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and $270 billion of short-term and long-term
debts. The net cash is negative $174 billion.
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If we add these businesses’ fair values
together with Amazon’s negative net cash here,
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Amazon’s intrinsic value should be approx.
$1.6 trillion for the entire company. Its
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intrinsic value should be around $3,095
per share before the 20-for-1 stock split.
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In comparison, Morningstar gave a much
higher fair valuation of $4,100/share.
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This means I believe Amazon stock is likely
undervalued at the time of making this video.
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So will I buy Amazon stock?
Yes, I will continue to buy
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more Amazon stock when it becomes more
undervalued because I like AWS’ large
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economic moat and its long-term growth prospects.
I already have had Amazon stock in my portfolio
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for several years already. Personally, I want
to have at least a 10% margin of safety before
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buying more Amazon shares. This means I will
wait until Amazon drops at least 10% below its
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intrinsic value before buying the stock.
Based on my estimates, I believe Amazon’s
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intrinsic value should be around $1.6 Trillion
for the entire company and $3,095 per share
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before the upcoming 20-for-1 stock split.
Every quarter, I will update Amazon’s intrinsic
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value once the company releases its latest
earnings. If you want the latest intrinsic
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value estimate for Amazon, you can download it
in my Patreon Blog in the video description.
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Now, all these estimates are only my opinions
and my analysis based on my research. They are
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not financial advice. There are always risks
associated with investing. You will need
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to do your own research and do your extra due
diligence first before investing in anything.
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Thank you for watching this
video and supporting our channel.
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This is Victor from the Intelligent Investor
Channel, and I will see you in the next video.
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