Essay on Amazon Stock News
Number of words: 1211
Amazon is an online retailer that operates a giant e-commerce platform where customers can buy any items from the comfort of their smartphones and Personal Computers (PCs). Amazon operations are segmented into three main categories, namely Amazon web services, International and North America (Robischon 2). Amazon’s e-commerce operations have fuelled its massive growth in its revenues. Principally, Amazon generated $14.8 billion in revenues in 2008 compared to circa $280 billion in revenues in 2019 (Amazon).
Arguably, Amazon is one of the publicly traded companies that have been hugely successful in creating investor wealth. In the last ten years, Amazon has generated 2450% in returns. Further, for the last twenty years, Amazon generated 8400% in returns (Amazon). Despite the Covid-19 pandemic greatly affecting equity markets in the first quarter of 2020, Amazon was hardly unaffected. In particular, in 2020, the company’s stocks registered a 75% gain (Amazon). Currently, Amazon is valued at $1.6 trillion. Amazon is the world’s largest e-commerce platform. In 2019, Amazon registered a 25.3% increase in its total transaction value from $177 billion in 2018 to $222 billion in 2019 (Amazon). Subsequently, this means that Amazon directly accounted for circa 57% growth in the USA’s e-commerce sector and 37% in the aggregate e-commerce sales in the USA (Amazon). Undoubtedly, this demonstrates that Amazon has greatly benefitted from the increased online shopping occasioned by the Covid-19 pandemic. The Covid-19 pandemic resulted in countrywide lockdowns and social distancing, which bolstered the need for online shopping. Partly, this explains why in the last two quarters, Amazon registered a 33.5% increase in its sale to register a record high of $164.3 billion in sales (Amazon).
Moreover, during the pandemic, Amazon increased its grocery delivery capacity by circa 160%. In the same period, Amazon tripled its online grocery sales. Generally, worldwide e-commerce sales are expected to rise to $ 6.5 trillion in 2023 from $3.53 trillion in 2019 (Amazon). Undoubtedly, because of Amazon’s strategic positioning in the e-commerce market, its stock will grow faster than those of its competitors. However, it should be noted that despite e-commerce being Amazon’s largest business segment, a significant proportion of its profits are generated from Amazon Web Services (AWS). AWS derives most of its profits from worldwide sale of service offerings such as database, storage, and compute to government agencies, enterprises, start-ups, and academic institutions. In the second quarter of the 2020 financial year, sales from AWS rose by 29% and accounted for 12% of all the sales (Amazon). Despite this, the AWS segment accounted for circa 57% of the total operating income (Amazon). Plausibly, this is because the AWS segment has higher profit margins than the e-commerce segment. Further, the demand for cloud computing services rose during the pandemic because of the expansion of the work from home economy (Amazon). Nonetheless, Amazon still faces competition from Google Cloud, Alphabet Inc., Azure, and Microsoft Corporation.
On 29th October 2020, Amazon announced its financial results for the third quarter, which ended on 30th September 2020 (Amazon). For the second-consecutive quarter, Amazon registered both record profits and sales. In particular, Amazon’s net sales increased by circa 37%. In the third quarter of the last financial year, Amazon registered $70 billion in net sales compared to $96 billion in the third quarter of the current financial year (Amazon). Similarly, Amazon’s net income increased by 200% (Amazon). Notably, in the third quarter of the last financial year, Amazon registered $2.1 billion in net sales compared to $6.3 billion in the third quarter of the current financial year (Amazon). In the same period, Amazon experienced a considered increase in its diluted EPS (Earnings per share). In the third quarter of the last financial year, Amazon’s diluted EPS stood at $4.23, compared to $6.3 in the current financial year (Amazon).
Additionally, in the trailing twelve months (TTM), Amazon’s recorded operating cash flows of $55.3, representing a 56% increase from the TTM that ended on 30th September 2020 (Amazon). Further, Amazon registered an increase in its free cash flows from $23.5 billion in the TTM that ended on 30th September 2020 to $29.5 billion in the current TTM (Amazon). Further, despite Amazon registering higher earnings per share, the company still does not make any dividend payments. Instead, Amazon chose to invest its free cash flow into high growth initiatives, just like any other technology company. Theoretically, Amazon can still make dividend payments if it decided to. Notably, in the last four quarters, Amazon recorded $24.3 billion in free cash flows, representing a 6% increase from the last TTM (Amazon). Also, if Amazon chose to make dividend payments, the dividend yield would be significantly low. Specifically, the dividend yield would only be a paltry 0.6% (Amazon). However, this is attributable to Amazon’s high share price, which stands over $3050 (Amazon).
Earlier this year, Amazon’s employees protested the proposal to increase the bar for shareholder’s resolutions. Specifically, this was after the Securities and Exchange Commission (SEC) introduced new rules and laws, which the employees feared would curtail shareholder activism (Glaser). The employees had been pushing Amazon to adopt strict measures and actions on climate change. Presently, shareholders who own up to $2000 of stock can propose changes in how an enterprise operates (Glaser). However, under the new model, only shareholders holding at least $20,000 worth of shares can propose changes (Glaser).
Ten-year Free cash flow estimates
The DCF (Discounted Cash flows) model is used to estimate the intrinsic value of a stock. Normally, the DCF model incorporates two stages of growth. The DCF model is premised on the assumption that a dollar today is more valuable than a dollar tomorrow (Simply Wall St). From the above table, the present value of the 10-year cash flows can be estimated to be $455b. Subsequently, the Gordon’s growth formula is used to compute the terminal value of the stock, which is $1.5t (Simply Wall St). Further, the present value of the terminal value is $664b (Simply Wall St). When this figure gets added to the present value of the 10-year cash flows we obtained the company’s total equity value of circa $1.1t (Simply Wall St).
To sum it up, Amazon is one of the companies that have recorded impressive growth in history. Despite starting as an online book retailer, currently, Amazon dominates the online retail sector. Besides, Amazon is also a cloud services provider and content studio, and movie-streaming giant. Although Amazon has never made any dividend payment in its history, at some point, the company will have to pay out dividends. Normally, this will be when Amazon’s future growth initiatives do not require significant investments. However, presently Amazon has numerous growth initiatives ranging from grocery stores to health and media content. Therefore, investors should not expect any dividend payments from Amazon despite its continually increasing profitability.
Amazon. “Amazon.com Announces Third Quarter Results.” Amazon.com, Inc. – Press Room, 2020, press.aboutamazon.com/news-releases/news-release-details/amazoncom-announces-third-quarter-results.
Glaser, April. “Amazon Workers Protest Proposal to Raise Bar for Shareholder Resolutions.” NBCNews.com, NBCUniversal News Group, 4 Feb. 2020, www.nbcnews.com/news/all/amazon-workers-protest-proposal-raise-bar-shareholder-resolutions-n1129216.
Robischon, N. O. A. H. “Why Amazon is the world’s most innovative company of 2017.” Fast Company Magazine 2 (2017).
Simply Wall St. “Estimating The Intrinsic Value Of Amazon.com, Inc. (NASDAQ:AMZN).” Yahoo! Finance, Yahoo!, 2020, finance.yahoo.com/news/estimating-intrinsic-value-amazon-com-101948819.html.