Note: This article was written in July 2017. Some of the facts and numbers have changed since then. However, perhaps the underlying theme still holds true.
Amazon is a wonderful company (Probably once in a lifetime type of company). Its founder Jeff Bezos is one of the most enterprising people in our generation.
Although, I wish I had invested in Amazon a few years ago. I am not sure if it’s a good investment at the current stock price. The current market capitalization of Amazon is 490 billion dollars. Looking at the Cash Flow statement I see that it generated about 10 billion dollars of free cash flow last year. The capital expenditure was about 7 billion dollars I’m not sure how much of that is for sustaining the current operations versus growing of operations. I feel there’s about a 2% yield of free cash flow vis-a- vis its market capitalization.
Looking at the Balance Sheet, the total liabilities is 64 billion dollars and the total current assets is 45 billion dollars. Therefore net total liabilities in my view is about 20 billion dollars.
Additionally, I see a share count dilution of about six million shares each year for the last few years. This is a kind of a red flag for me because I think the share count dilution is as a result of options issuance and I don’t like such a significant share count dilution every year. This is the science aspect of the analysis. (Check out the full article on Art and Scciend of Investing)
Talking about the art aspect I am a little worried about the feeling amongst investors that Amazon can’t do anything wrong and pricing it accordingly. I feel Amazon has a great hold on the US retail market but other than that I feel it’s vulnerable in other areas of its business. For example, Amazon web services has a strong market lead right now, but it is vulnerable in that area from the likes of technology giants like Google, Microsoft, etc.
Similarly in retail marketoutside of United States, I think it is vulnerable from local competitors in those economies. Even in the US retail market I know that it’s doing exceedingly well at the moment however I think if somebody like Wal-Mart gets their act together they can give fierce competition to Amazon in the ecommerce Market over the next few years. Wal-Mart has shown some signs of fighting back lately; but it is still an uphill battle for them.
I also think the investment that Amazon is making to expand its video library on Amazon Prime will not have sufficient returns due to competition from Netflix and also the changing landscape in that area.
I have the highest regard for Amazon CEO Jeff Bezos and the company but at this point, I’m not comfortable investing in Amazon at the current share price.
As a company, I think Amazon will do exceedingly well over the next few years. However, I’m not sure of my returns if I buy the stock now and therefore I’m not buying the stock at the current price.
Arrow of Performance 