AMZN is in stage #2. The stock is recovering from last year’s carnage. In 2022 it almost reached lows from 2020 Covid lows. It was a great buying opportunity. But for the entire 2023 it was rallying and erasing the losses. If you were bold enough to buy when everyone else was panicking, you are sitting on nice gains. The stock rallied 60% from the 2022 lows. And the company is a great business. On the surface, it may look like a boring bad enterprise – what is good about a grey boring internet selling portal? eBay does it too! But there is a difference between the two. There is very powerful advertising on their portals, powerful cloud service (gaining steam again), and much more.

 

 

The chart above shows how AMZN spiked hard from 2020 lows and rallied. Surprisingly, in 2021 it was flat and then bam! Huge drop! And a huge opportunity!
AMZN shows great revenue growth. Annually, it is at 10.85% and a 5-year average is 20.50%. That is great for a behemoth like AMZN. It is a mature company where you would expect slowing down, yet it is capable to grow in double digits.

 

 

In 2022 analysts were predicting the end of cloud services, less advertising, and overall slowdown. The AWS was flat in 2022 for two quarters but it picked up again last quarter as doom and gloom is not happening:

 

 

Advertising services are picking up. It was a new product for AMZN which they started in 2022 and everyone was predicting the end:

 

 

But the biggest revenue driver is subscription services mainly their Prime. Amazon is collecting $10 billion just from the subscription fees. Tell me how can this go wrong?

 

 

Despite all the positive revenue growth, Amazon’s free cash flow is a bit wacky. The entire 2021 and partially 2022, it was negative and Amazon was burning cash.

 

 

We get even worse performance if we overlay stock based compensation over the free cash flow. And the stock compensation is growing eating up the free cash flow:

 

 

Free cash flow that is left after deducting the stock compensation:

 

 

AMZN’s EPS was growing since 2017, spiked in 2021 as people were shopping from home. But then a negative EPS in line with analysts. The company is growing its earnings again:

 

 

AMZN has a growing debt and diminishing cash on hand. In the past it could eliminate its entire debt with its cash. If their cash keep falling and debt growing, the company will become negatively leveraged.

 

 

Amazon doesn’t pay dividends so it is a purely growth stock. I own 100 shares of the company and I sell covered calls to generate income.
The company also dilutes investors as it is issuing new shares and constantly growing its shares outstanding. It dilutes by 2.69% on annual basis, a 5-year average is at 0.88%. I would like to see the company to buy back their shares.

 

 

Amazon went for a hiring spree in 2020-2021. It was an era of hiring everyone who could pronounce their name. The company was hiring steadily before but you can see an enormous jump in 2020. This was not a healthy growth. But the company started laying off their workforce. This may have an impact on the labor market:

 

 

The stock was trading below its 2025 fair value most of the time in 2020, 2021, and 2023 but now it is already above that level. Unless its fair value increases, the stock is now expensive and I don’t think investable. Of course, we may speculate whether the stock reaches its 2021 levels and play that game, but it may not get there anytime soon.

 

 

The stock has a history of long period of going nowhere. It takes it usually 2-3 years before it breaks from the consolidation pattern. And 2021 was a very unusual year so speculating that the stock will recover to those levels quickly may be risky. I recommend buying only when the stock gets below its fair value.

 

 

The stock is now HOLD
 

This post was published in our newsletter to our subscribers on Saturday, September 3rd, 2023. If you want to learn more about our stock technical analysis subscribe to our weekly newsletter.