- Buying Amazon is like buying Netflix, Costco and Salesforce.com all at once.
- By all reports Amazon is killing it this Christmas season.
- Even at three times its expected 2015 sales, the Amazon stock is a bargain.
At another site where I write, I have come in for a lot of criticism because I have been pounding the table for Amazon (NASDAQ:AMZN) for over a year. And in this calendar year, Amazon has truly justified my love. Amazon shares are up a whopping 113% just in this calendar year. The bears convinced me to take a little profit off the table a few months ago – I sold-out one-fifth of my position in Amazon – and now I’m sorry I did. Amazon shares have risen $100/share in the months since.
The bear case is that Amazon's numbers can’t keep growing as they are growing, that the company is running at break even, that profits are basically an accident and that the posse – in the form of companies like Walmart (NYSE:WMT), Alphabet Inc-C (NASDAQ:GOOG), and Microsoft (NASDAQ:MSFT) – is gunning for it.
Please ignore these people. What has made Amazon stock such a powerful one to own, its Amazon Web Services (AWS) cloud – is if anything becoming more powerful. AWS generated over $2 billion in revenue during the September quarter, up 25% from just two quarters before, and it has without question become the dominant player in cloud infrastructure. The year-over-year revenue growth is now 81%, and Amazon Web Services brings $1 of every $4 in cloud revenue to its bottom line.
The closest comparison to this is Salesforce (NYSE:CRM), which is really selling cloud software, not cloud infrastructure. For its most recent quarter Salesforce had revenue of $1.7 billion, and negative net income. The year-over-year growth rate was 24%. Yet Salesforce is said to be “killing it,” and its stock is up 32% this year, to $51 billion in market cap.
What gives Amazon the financial power to grow in cloud, which is incredibly capital intensive, is some underlying source of enormous cash-flow. Microsoft has software, Google has search, and Amazon has its online store. Amazon is comparable to Costco (NASDAQ:COST), which had revenues of $27 billion in its most recent quarter, which included most of November, and generates over $4 billion in operating cash flow each year. Amazon generates $3.5 billion in operating cash flow, and did $29 billion in business during last Christmas. Amazon's operating cash flow is expected to blow by that this quarter, with analysts expecting $36 billion in revenue and $1.62/share in earnings.
What about the third leg of the triangle, streaming? There the comparison is to Netflix (NASDAQ:NFLX), which had revenues of $1.74 billion for its last quarter, up 23% from a year earlier. Amazon does not break out its streaming revenue, but it has about 44 million Amazon Prime members and 50 million as per certain other reports, each paying $99/year for free shipping and some free media services. This actually under-estimates the case, because Amazon doesn’t just sell a streaming service – it also sells and rents videos. And it doesn’t just do this on its own account. Amazon has said it will soon start re-selling others’ streaming services, including Netflix, taking a small cut and adding yet-more traffic to its cloud in the process.
What this adds up to is that you’re getting Costco, Salesforce, and Netflix’ worst nightmares in one giant operation, one that by all reports is absolutely killing it this holiday season. Costco sells at about two thirds of its revenue, Netflix and Salesforce at 10 times theirs. You can get Amazon stock, today, for less than three times its expected revenue for the current year.
Yes, Amazon stock expensive in terms of valuation, but it’s also the best bargain of the season.