Can a giant Amazon be a ‘growth stock’?

U.S. consumer goods stock Amazon.com, Inc. earned a lot more in 2016. We expect it to keep growing fast as it takes sales away from ‘bricks and mortar’ retailers. It remains a buy for long-term share price gains. But only if you need no dividends and you can accept share price risk.

Seattle-based consumer goods stock Amazon.com’s (NASDAQ—AMZN) earnings are growing quickly. It’s also growing safely, with a solid balance sheet and excess cash flow.

Consumers are becoming more familiar with shopping online. Millennials, for instance, buy most of their clothes online. As a large online retailer, Amazon is taking business away from ‘bricks and mortar’ retailers.

It remains a buy for long-term share price gains. But only if you need no dividends. Also keep in mind that the high share price exposes you to risk if anything goes seriously wrong.

In 2016, Amazon earned $2.4 billion, or $4.90 a share. This was close to fourfold the $596 million, or $1.25 a share, it earned the year before.

This global growth stock’s earnings are also growing quickly

The company writes: “Fulfillment by Amazon (FBA) delivered more than two billion units on behalf of sellers in 2016. . . . Amazon sellers from more than 130 countries fulfilled orders to customers in 185 countries.”

Amazon’s net sales of both products and services jumped. With regards to products, Media (books, music and videos) accounted for 21 per cent of sales; electronics for 71 per cent and other for eight per cent.

One problem that Amazon faced was the high and rising American dollar. This reduced last year’s sales by $550 million. But that’s only a fraction of last year’s sales of $136 billion. International sales accounted for about a third of total sales.

Cash of $26 billion and rising cash flow

Amazon built an excellent balance sheet. It holds cash and marketable securities of $25.981 billion. This greatly exceeds total debt of $7.694 billion. That is, the company has no net debt. Thanks to excess cash flow, its balance sheet should remain healthy.

In 2016, Amazon generated cash flow of $12.527 billion. This was up by a third from $9.363 billion, the year before. What’s more, the cash flow surpassed capital investment of $4.589 billion and acquisitions of $795 million.

One positive aspect of Amazon is that management and employees own 17.7 per cent of the shares. This means that it’s very much in management’s interests that Amazon continue to prosper. It makes management’s interests similar to yours.

In 2017, Amazon’s earnings are expected to grow by more than 56 per cent, to $7.65 a share. Based on this estimate, the shares trade at a price-to-earnings, or P/E, ratio of 109.3 times. Next year, the company’s earnings are expected to advance by nearly 61 per cent, to $12.28 a share. Based on this estimate, the shares trade at a P/E ratio of 68.1 times. This is a high multiple. Then again, the company’s earnings growth is high.

The consensus recommendation of 14 analysts is that Amazon is a ‘Strong Buy’. We rate it a ‘Buy’ for long-term share price gains. But only if you need no dividends and you can accept share price risk.

 

This is an edited version of an article that was originally published for subscribers in the February 24, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

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