Valuentum Exclusive Analysis for the Discerning Investor

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Image: Amazon

By Brian Nelson, CFA

We recently wrote a note about how lucky Amazon (AMZN) is to even be in existence today, “The Role of Luck in Investing and How To Think About It:”

As investors, we underestimate the role of luck in a company's long-term success. In February 2000, a month before the dot-com market crash, a fledgling Amazon raised $672 million in convertible notes to European investors. If the company hadn't done so, there'd likely be no Amazon today, and one of the wealthiest men in the world, Jeff Bezos, might have just been a mere footnote in stock market history. Amazon would have been insolvent in 2001-2002 just like many of its other dot-com peers.

That’s neither here nor there, however, as Amazon has grown into a company with tremendous financials. It now fits the bill of what we describe as a net cash rich, free cash flow generating powerhouse with a competitively advantaged business model with deeply entrenched ties to secular growth tailwinds with respect to AWS and e-commerce proliferation. We tend to prefer Facebook (FB) and Alphabet (GOOG) in the Best Ideas Newsletter portfolio, but investors can do a lot worse than being a shareholder of Amazon.

On October 29, Amazon posted fantastic third-quarter results with both revenue and EPS coming in better than expected. Net sales advanced 37%, to $96.1 billion in the quarter, while operating income jumped to $6.2 billion in the period, compared to $3.2 billion in the same quarter last year. EPS came in at $12.37, up significantly from the $4.23 mark it achieved in the third quarter of 2019. Fourth quarter 2020 guidance calls for net sales to grow 28%-38% on a year-over-year basis, and CEO Jeff Bezos’ is optimistic that the momentum will continue:  

We’re seeing more customers than ever shopping early for their holiday gifts, which is just one of the signs that this is going to be an unprecedented holiday season. Big thank you to our employees and selling partners around the world who’ve been busy getting ready to deliver for customers this holiday.

Amazon’s free cash flow generation has been tremendous of late. During the trailing twelve months ended September 2020, free cash flow increased to $29.5 billion, up from $23.5 billion in the trailing twelve-month period ending September 2019. At the end of the quarter, cash and marketable securities totaled $68.4 billion, while long-term debt stood at $32.9 billion, good enough for a very nice net cash position on the balance sheet. We continue to be huge fans of companies with strong and growing free cash flow generation and outsize net cash positions on the balance sheet.

Amazon’s third-quarter earnings release was full of notable news items. The company said that Amazon’s Prime Day (October 13-14) revealed third-party sellers surpassed $3.5 billion in sales, reflecting a nearly 60% year-over-year increase. The company noted that it launched the first Amazon Fresh grocery stores in Woodland Hills and Irvine. Amazon Studios was busy with the launch of Borat Subsequent Moviefilm and Without Remorse, and the company remains tuned in to consumer preferences with new and returning Amazon Original series, too. During the quarter, net sales at AWS advanced nearly 29%.

Concluding Thoughts

If we were not already very tech/consumer/e-commerce heavy in the Best Ideas Newsletter portfolio with Facebook and Alphabet, etc., we’d seek to include Amazon in the Best Ideas Newsletter portfolio, too. We love Amazon’s strong and growing free cash flow generation and its robust net cash position on the balance sheet. Its competitive position and ties to future growth in key areas of AWS and e-commerce make it among the most attractively-positioned companies out there. We value shares of Amazon at over $4,000 each at the high end of the range, and we would not be surprised to see them trading there in the not-too-distant future.

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Brian Nelson owns shares in SPY, SCHG, DIA, VOT, and QQQ. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.