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Amazon Stock Investors Are Asking the Wrong Question

Chris Markoch

Despite having its stock price decline by 13% in the last six weeks, analysts still love Amazon (NASDAQ:AMZN). Some analysts have set a price target for AMZN stock of $2,400 by the end of 2020 and $3,000 by the end of 2024.

However, if you’re basing your decision to invest in Amazon stock on an 80%+ appreciation in stock price in five years, you’re asking the wrong question. The better question is: will Amazon be the same company in five years as it is today?

Amazon May Be a Victim of Its Own Success

During the holiday season of 2013, Amazon was skewered by customers for late deliveries as online orders overwhelmed the capacity of third-party carriers. At that point, Amazon CEO Jeff Bezos essentially said never again. To remedy the problem, the company made a massive investment in its shipping and fulfillment centers. Between 2010 and 2018, Amazon’s shipping and fulfillment costs rose 1,022% to $61.7 billion. That’s 25% of AMZN revenues.

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Growing out Amazon’s fulfillment centers and shipping fleet has been one part of Bezos’ strategy to place growth ahead of profitability. To the delight of AMZN stock investors, Bezos has managed to get both. However, as Amazon Prime moves to free one-day shipping, there may be some question as to how much growth is left.

Amazon Continues to Look at New Markets

Apparently Jeff Bezos is asking that same question. Just this year, Amazon has made moves into the electric truck market by being the lead investor into Rivian, they are also investing in Aurora Innovation, a self-driving auto startup. However, while those moves can be seen as deft moves to enhance their core business, other moves are not so obvious. Like their acquisition of online pharmacy company PillPack and their intention to be part of the race to launch satellites for broadband internet connectivity to under-served areas.

Yes, the company hit a home run with their Amazon Web Services, but as AWS grows it is putting Amazon right into the teeth of government regulators who are increasingly suspicious of companies that are trying to profit from the use of subscriber’s personal information.

Amazon Stock May Be the Ultimate Defensive Stock

As much as Amazon continues to behave like a startup, the market wants to reward it for being a defensive internet stock. In the minds of some investors, one of the storm clouds for the broader market is the possibility of a recession. Some analysts will point to Walmart (NYSE:WMT) and Target (NYSE:TGT), who are carving out a niche in the digital business that matches Amazon’s fulfillment options and pricing, as evidence that Amazon’s moat is shrinking. However, when talk turns to a recession, analysts continue to love AMZN stock.

During the “Great Recession” of 2007-2009, Amazon stock declined 8%. The S&P 500 by contrast tumbled 36%. Amazon also came in significantly ahead of other FAANG stocks Alphabet (NASDAQ:GOOGL) and Apple (NASDAQ:AAPL) as well as another tech giant, Microsoft (NASDAQ:MSFT). Amazon was not unaffected by the recession, but clearly it showed that they were well positioned then, and arguably better positioned now.

The company may not like being thought of as a defensive stock, but if it walks like a duck and quack likes a duck … it may be a duck.

Amazon Is Growing Up Fast

It can be easy to still think of Amazon as a cool tech startup. But the reality is that Amazon is growing up. Some parts of its business could even be said to be in middle age. Over the last 12 months, AMZN’s operating cash flow has exploded to nearly $26.7 billion compared to $5.5 billion five years ago. Net income is rising as well and Amazon, once chastised for a lack of attention to the bottom line, is now a consistently profitable company.

Right now, Amazon is using their pile of cash to pay down debt. Specifically the $13.7 billion it acquired from its Whole Foods purchase. And the company will likely continue to make capital expenditures as it ramps up its Amazon Web Services.

But if Amazon keeps seeing significant gains in earnings and cash flow (that’s not such a big if), it may not be too much longer before shareholders start looking to Amazon to return some of that cash in the form of a dividend.

That’s not likely to happen soon. The math for a dividend doesn’t work at this moment. Amazon has approximately 500 million shares outstanding. If they used every penny of their $13 billion free cash flow over the last 12 months, it would pay a dividend of about $26 per share. That 1.5% yield would not excite most investors.

However, the same investors who are looking to Amazon for growth today are growing up as well. Not today, not tomorrow, but sooner than Amazon may like, those investors may look at a $3,000 per share price tag as too rich for a stock that doesn’t offer them something by way of a dividend.

As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.

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