Is Amazon’s stock price close to the bottom or will it continue to fall? (NASDAQ:AMZN)

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Introduction

Amazon Inc (NASDAQ: AMZN) has lost over $800 billion (~42%) of its market capitalization in the past six months, with a catastrophic drop accelerating shareholder losses since the stock crashed from the technical box we have speak in mid-April:

Y-Charts

Y-Charts

In this note, we’ll discuss the key factors behind Amazon’s stock decline and use a mix of fundamental, quantitative, and technical data to gauge the next move in this meter. Let’s start by identifying the factors that triggered this sellout on Amazon.

Why did Amazon shares crash?

Just a month ago, I said that Amazon’s stock split (in June) could trigger the next leg of its action; however, that call went bad in no time (before the split even happened). While I’m amazed at how quickly Amazon shares have fallen, I’m not entirely surprised as I saw this risk just after Q3 2021. Here’s what I said in early November 2021:

Over the next quarter or two, Amazon shares are expected to remain in the penalty box as the company grapples with macroeconomic adversity. As we discussed today, Amazon faces higher operating costs during a heavy investment cycle (damaging FCF generation). With declining sales growth and declining profitability, Amazon shares could be under pressure for the foreseeable future. The $3,000-$3,300 demand zone may be tested over the next few months (a failure to hold could trigger an even bigger sell-off); however, such declines would be fantastic long-term buying opportunities.

Source: Amazon Q3 Benefits: The Perennial Growth Machine Has a Problem

In the first quarter of 2022, Amazon’s revenue growth slowed to just 7% year-on-year, indicating a history of interrupted growth. As you may know, macroeconomic headwinds and supply chain issues are negatively impacting Amazon’s retail business. Additionally, Amazon finds itself in a heavy investment cycle that suppresses its cash flow generation.

Publication of Amazon's results for the first quarter of 2022

Publication of Amazon’s results for the first quarter of 2022

Looking for Alpha

Looking for Alpha

Presentation of Amazon's results for the first quarter of 2022

Presentation of Amazon’s results for the first quarter of 2022

Wall Street analysts say Amazon’s stock is being repriced lower due to weak revenue growth and negative free cash flow margins seen in the first quarter of 2022. As Amazon’s decline continues is certainly accelerated after the release of the first quarter results, this fundamental data has been public information. for months now. So what has changed?

Well, in my view, soaring interest rates are the primary driver for the revaluation of Amazon stocks (as they have been for the revaluation of other mega-cap tech stocks as well). Amazon’s decline just got deeper due to its higher starting valuations (relative to earnings).

10-year Treasury rate

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Y-Charts

Y-Charts

After a stock drop of around 40%, it’s only natural to ask this question –

Has Amazon’s stock bottomed out?

In fact, the maximum drop for any stock is 100%, and the idea of ​​a bottom is really just a concept. However, let’s try to locate this “hypothetical bottom” using a few fundamental, quantitative and technical data points.

As you can see below, Amazon is currently the most expensive mega-cap tech stock based on price-to-earnings ratio (forward). Despite the massive drop in Amazon shares, there may be more downside here depending on fundamentals. I don’t think a company growing 10-15% per year can sustain a PE multiple of around 130x. Now, we know that Amazon’s earnings are suppressed by reinvestments, but this market is high in emotion, and it could continue to reprice Amazon lower based on these relative metrics.

Y-Charts

Y-Charts

According to SA Quant Ratings, Amazon’s stock is currently “Hold”, with the rating factor for the valuation being an “F-“. As sales growth, profitability and stock prices fall in tandem, I expect this rating to move from “Hold” to “Sell” in the coming weeks. Therefore, the quantitative data looks worrying for Amazon.

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Searching for Alpha Quant Ratings

In the near term, these quantitative ratings point to more bearishness for Amazon shares. The technical chart is also broken and the next demand zone is between $1,750 and $2,000. As the RSI approaches oversold territory, I don’t think Amazon’s stock will reach $2,150 here. In my opinion, Amazon could lose another 400 points before finding support (low potential).

Y-Charts

Y-Charts

That being said, I don’t know where Amazon’s stock will be tomorrow, next week, next month, next quarter, or even next year. I don’t have a crystal ball. Luckily, we don’t need to play this short-term market timing game, and the only thing we need to determine (as long-term investors) is whether Amazon is a good buy here for all 3 , 5 or 10 years.

Will Amazon Stock go back up?

While the fundamental, quantitative, and technical data suggests more near-term downsides, these data points mask the (fast growing) intrinsic value of Amazon’s AWS (cloud) and Digital Ads businesses. My entire investment thesis for Amazon is based on these companies, and if you look under the hood, you’ll find two fast-growing profit centers within Amazon’s gargantuan conglomerate:

Publication of Amazon's results for the first quarter of 2022

Publication of Amazon’s results for the first quarter of 2022

Let’s do some rough math to estimate the value of Amazon’s cloud business [AWS]:

  • NTM revenue: ~$100 billion
  • Operating margin: 35-40%
  • FCF margin: 30-35%
  • MNT FCF: 30 to 35 billion dollars
  • Multiple P/FCF terminal: 30-35x
  • Intrinsic value of AWS: $900 billion to $1.225 billion

Even if we apply a multiple terminal to AWS, its valuation would be around $1,000,000, which is Amazon’s entire market capitalization. For your information, AWS is currently growing at over 35% and the cloud market still has a long streak of growth, with enterprise adoption estimated at around 15%. While critics say AWS is a commodity, I see it as critical business infrastructure. In its current form, AWS could easily command a P/FCF multiple of around 50x, which would mean this business is probably worth $1.5T on its own. In the past, I’ve shared that Amazon’s digital advertising business might be worth even more than its cloud business. With Amazon’s market capitalization of approximately $1.08 billion, Amazon’s retail, prime subscription, and digital advertising businesses are offered for free. Obviously, the market is running a massive conglomerate discount on Amazon; however, this is an opportunity for long-term investors to lock in the hidden alpha here. While there are no investment guarantees, I’m willing to bet my house on this statement – “In five years, Amazon’s market capitalization will be much higher than it is today. .”

Is AMZN stock a buy, sell or hold?

So far, we’ve seen that Amazon’s stock might have a short-term downside of around another 400 points, but what about the upside? Now let’s determine Amazon’s absolute fair value using the LASV model to gauge its upside potential:

In 2022, Amazon is expected to register sales of $540 billion at an annual growth rate of 15%. According to consensus analyst estimates, Amazon is expected to hit the annual revenue milestone of $1,000,000 by 2027; my bet is that it will get there by 2026.

Amazon revenue estimates

Searching for alpha estimates

Amazon EPS Estimates

Searching for alpha estimates

In the medium term, Amazon may no longer be a revenue growth story, as the company grows every year in the mid-teens. However, Amazon is expected to be a story of operating leverage, with earnings growth expected to significantly outpace revenue. The expansion of operating margins will come from a greater revenue contribution from AWS subscriptions, Ads and Prime.

Y-Charts

Y-Charts

Over the next three years, Amazon’s EBITDA is expected to grow from $72 billion to $134 billion (almost ~2x in 3 years). With potential margin expansion and healthy revenue growth, Amazon looks like an easy bet ~2-4x (in 3 years) from here.

Source: Amazon: stock split, buyout, syndicates, etc.

Hypotheses:

Estimated turnover 2022 [A]

$540 billion

Potential free cash flow margin [B]

20%

Diluted average number of shares outstanding [C]

530 million

Free cash flow per share [ D = (A * B) / C ]

$203.77

Growth rate of free cash flow per share

ten%

Terminal growth rate

3%

Years of high growth

ten

Total number of years to boost

100

Discount rate (our “next best alternative”)

9.8%

Results:

LA Stevens Assessment Model

LA Stevens Assessment Model

LA Stevens Assessment Model

LA Stevens Assessment Model

According to my analysis, Amazon’s intrinsic value is around $6,000 per share, i.e. it’s undervalued by around 65%. Over the next decade, Amazon’s stock price could rise at a CAGR of 26.27%, which easily exceeds my 15% investment rate. Therefore, Amazon is a fantastic long-term buy at current levels.

Final Thoughts

Let’s conclude today’s discussion by answering this question:Is Amazon’s stock price close to the bottom or will it continue to fall?

Based on my analysis, Amazon’s stock could have more short-term downside (about 400 points) under current market conditions which appear to be heavily influenced by a rapidly changing macroeconomic environment. However, Amazon’s fair value (based on future free cash flow) is $6,000 per share. While consensus investor sentiment remains bearish as rising interest rates continue to lead to valuation contraction for tech mega-caps, I like the asymmetric risk/reward (4000 bp up / 400 bp down) offered by Amazon. Therefore, I am very bullish on Amazon at current levels.

Takeaway key: I rate Amazon a solid buy at $2,150.

As always, thanks for reading and happy investing. Feel free to share your questions, concerns, or thoughts in the comments section below.

Karen J. Nelson