Why Amazon is the absolute best investment you can make.

Published on 20 Oct 2020 / In News & Politics

To celebrate Amazon Prime Day, let’s revisit why Amazon ($AMZN) is still my favorite capital compounder for the long haul by far...

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My Analysis From Morning Cents 10/13/20:
Despite a three-month delay, Amazon Prime Day is here, and it could be a record-setting event for the e-commerce giant. eMarketer projects Amazon’s global sales will reach nearly $10 billion over the next two days, with $6 billion coming in the U.S. alone. Amazon came up with Prime Day to “drum up sales” in July, a generally quiet time of the year for shopping. Thanks to Covid-19 delays, the two-day sales event is now kicking off this year’s holiday shopping season roughly three weeks before it usually gets underway.

A late Prime Day does not materially change my view on Amazon stock long term.

($AMZN) from the first half of 2020: Revenues are split: 61.8% North America sales, 25.4% International sales, 12.8% Amazon Web Services (“AWS”). North America sales have 3.4% profit margins, international sales are breakeven, and AWS has 30.6% profit margins. As such, AWS represents 65.4% of all Amazon’s operating profit. Capital expenditures have doubled this year because they are reinvesting in additional capacity in fulfillment in the continued business growth in AWS

People still fail to give Amazon credit for its multi-layered and non-linear growth. Of course, they will continue to grow their Amazon Prime subscribers count, which grew from 100 million in 2018 to 150 million in January 2020 and non-subscribers buying goods. But Amazon Prime members also increase their purchases on Amazon’s platform in a huge way, with much larger spending per household than non-members. Furthermore, Amazon is making inroads into the home (Alexa, Echo, Fire TV) to increase spend per household, including much more profitable digital movies and goods.

Ignore Amazon’s profits for now, since it’s clear it reinvests almost all the money it makes. I believe Bezos’ ultimate goal is to build out an online marketplace and physical distribution network through which (all?) e-commerce purchases go through, both digital and physical. Once Amazon can achieve this, it can extract a toll on all consumer spending.

On top of all that, we get to own the most-dominant cloud business out there - Amazon Web Services (AWS), a very high-profit margin business growing at over 30%. It’s as much of a cloud computing play as a consumer spend one.

And we get to own all of this for a reasonable 25x forward EBITDA and 9.5x forward Gross Profit? Even if I buy slightly too high or low at any given time, I know how great this business is and won’t bat an eye if the market tanks 15%+. When Amazon stock dips 15%, I get excited for my own little Amazon Prime Day; I get one of the best assets in the world on sale. Amazon will eat the e-commerce world, and I want to be along for the ride in a big way. The only thing we need to keep an eye on is potential government restrictions or a breakup.

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