For several weeks I have been trying to find an interesting American, Swiss or French title to submit to you, following the results of the survey. However, the market is so crazy right now that I feel like I'm looking for a needle in a haystack. So I thought I'd take things the other way: rather than playing the contrarian as usual, I'm going to play the sheep and tell you about the company that makes almost every investor on the planet light up. I guess I don't need to introduce it to you, because it's ubiquitous and can boast of being the second largest company in the world in terms of market capitalization, just behind Microsoft.
So, let's see what it says...
Valuation & dividend
Let me tell you right away, Amazon is very expensive, and I'm not just talking about the price which is approaching 2,000 USD (which it has already exceeded a few times). Indeed, the American online retail giant is trading at:
- 90 times current recurring earnings
- 300 times average recurring earnings
- 36 times tangible assets
- 20.5 times book value
- 3.84 times sales
- 51.7 times current free cash flow
- 107 times the average free cash flow
It's so huge that it's scary. EBIT and EBITDA represent a paltry 1.38%, respectively 1.43% of enterprise value, which confirms AMZN's stratospheric valuation.
As for the dividend, it is quickly seen that there is none. Growth companies often justify this by the fact that they need all the available cash to finance their development. We will indeed see later that Amazon seems obsessed with this point, to the detriment of shareholders.
It is also generally said that quality comes at a price and that it is normal to pay more for a company that benefits from excellent fundamentals. So let's see what it is...
Balance sheet & result
If the company does not pay a dividend, its profit, its cash reserves and the value of its assets have been increasing dramatically for several years. Between 2017 and 2018 alone, net profit exploded by 232%! There, nothing to complain about, we pay for growth and we get exactly that.
Avec de tels chiffres, et en l'absence de paiement de dividende, on pourrait s'attendre à trouver une entreprise qui bénéfice d'un coussin de liquidités confortable. Étonnamment pourtant le current ratio ne se monte qu'à 1.1 (en légère hausse) et le quick ratio à seulement 0.85. Il semble que le géant d'Internet soit particulièrement dépensier. Vu que les banques n'ont d'yeux que pour Jeff Bezos en ce moment, Amazon n'a aucune raison de faire des économies et tout la pousse donc à exploiter chaque cent disponible pour fuir encore plus en avant.
The gross margin is very good, with 40.2% (up), but this does not translate as well to the net margin which is only 4.26%. Profitability on the other hand is excellent, with an ROE of 22.77%. This excellent result is nevertheless explained by Amazon's massive reinvestment in its own development (to the detriment of shareholders), as well as by a recourse to debt that is quite surprising for a company generating such profits.
Debt is indeed 1.13 times equity and the long-term debt-to-asset ratio is a whopping 24,46%. AMZN would need six years to repay its entire debt, using its average free cash flow. The use of debt also represents a negative average annual return for the shareholder of nearly 1%. In addition, the number of shares outstanding has been increasing steadily for several years, which also represents a negative average annual return for the shareholder of nearly 1%.
Conclusion
We see that Amazon uses every means at its disposal to finance its activities: every cent it generates, every share it can issue and every dollar it can borrow. And of course it gives nothing to shareholders. On the contrary, the latter suffer a Shareholder Yield of -2% per year on average due to the use of debt and the issue of shares.
One might want to turn a blind eye, ultimately telling oneself that the American giant has become a must-have and that it enjoys a quasi-monopolistic situation. However, the figures contradict this image, because, apart from a good gross margin and rising goodwill, the reality is quite disappointing. The average net margin over the last five years is only 2%, overheads are high, at nearly 58%, debt is significant and capital expenditures are very high (nearly 300% of profit). In short, we are very far from what we would expect from a quality company, for which you have to pay a very high price.
Let us add to this that the volatility The stock price is very high, with 35%, not to mention a beta of 1.55. We don't dare imagine what it will be like when the market corrects, especially from the level Amazon is starting from. The price has increased more than fivefold in the last five years, I wouldn't be surprised if it falls even lower than where it was in 2014...
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I find this analysis a bit summary. At the very least, it would have been necessary to talk about the three divisions of Amazon: Amazon USA, Amazon International and especially AWS which is very profitable and growing strongly.
For the Amazon known to the general public, we must nevertheless realize that the race forward is essential and that the difficulty lies in predicting the profits generated not today but in 10 years. Because currently, only AWS is really profitable, Amazon USA is in the green but still suffers from monstrous delivery costs, Amazon International is still in the red also because of delivery costs. But Amazon is creating a long-term ecosystem that will offer its customers products, music, films, sporting events... At a certain point, the profits will rain down but currently, the company is making profits almost in spite of itself, Bezos is absolutely not looking for them.