Amazon (AMZN) is Presently an Undervalued Opportunity Within the Magnificent Seven

According to Yahoo Finance, all of the Magnificent 7 stocks (Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia and Tesla) have all reported their fourth quarter earnings as of February 23, 2024. 

Amazon's North American revenue topped $100B in the fourth quarter reported earnings, beating analyst expectations. Their operating income and free cash flow have increased dramatically and sequentially since Q4 2022.

             Figure1: Amazon's operating income (source: Amazon 4th quarter 2023 earnings conference call)

           Figure 2: Amazon's free cash flow (source: Amazon 4th quarter 2023 earnings conference call)

Amazon's stock price historically has tended to follow it's operating cash flow (OCF) as can be seen in the FASTgraphs chart below.  This is in contrast to many stocks where the price tends to track basic operating earnings. 

 Figure 3: 10-year price performance versus operating cash flow (OCF/FFO) for AMZN (2014-2024)            

The stock price is well below the Normal P/OCF Ratio of 25.32x and the P/OCF=G of 28.68x for the ten year period.  

 

Figure 4: Cumulative Price and OCF comparison and valuation comparison for AMZN and SPY for the ten year period from 1/3/2014 - 2/23/2024 (source: FASTgraphs)

In the P/OCF graph (bottom graph of Fig. 4), we can see that the SPY is overvalued and AMZN is undervalued.  A fair value for AMZN with respect to P/OCF is 28.68x for the ten year period and the February 23, 2024 P/OCF for AMZN was at 20.18x. (note the blue solid trace is below the dashed blue line)

In view of analyst OCF forecasts for the next three years ending 12/31/2026 (FASTgraphs Fig. 5 below), using a P/OCF of 27.02, AMZN has the potential for an annualized return of 35.71%, turning a $10,000 investment into $23,893.  
Figure 5: Analyst projections for OCF for 12/31/2024 through 12/31/2026. 
 
Using a slightly more conservative P/OCF of 24.77 (not shown), the total annualized return would still be 31.63%, which would likely slay the S&P 500 if that were to verify.  Also, note that the OCF estimates have been revised upward significantly from 3 months ago and 6 months ago from 2024 through 2026. 

To see how AMZN performed over a past 10-year period (01/2014 - 02/2024), reference the FASTgraphs chart below for an initial $10,000 investment.  With a compound growth of 23.96% versus the S&P 500 compound growth of 12.55%, AMZN would have turned that $10,000 investment into $88,281 versus $33,170 for the S&P 500.  Even if one invested $1,000 instead of $10,000, that would have yielded $8,828. That is a stellar return for sure. 

                Figure 6: AMZN 10-year performance (01/2014 - 02/2014).   Source: Fastgraphs
 
 
      Figure 7: AMZN stock price (blue), 20-day EMA (green), 50-day EMA (red), 200-day EMA (purple)                                         Source: Yahoo Finance                                                                      
 
Amazon's stock price still has yet to retrace it's all-time high of around $186/sh (July 2021), but it has been trending up with higher highs and higher lows since early 2023.  It will be interesting to see if the stock price could reach it's all-time high in the coming weeks or next few months.
 
My current rating on AMZN remains a buy, as of February 23, 2024.  It's not a back-up-the-truck kind of buy, but if the stock price follows it's operating cash flow projections, it's an undervalued great company for investors having a greater than one year time horizon.  I like Amazon's diversified spectrum of services: E-commerce, AWS cloud, entertainment and advertising.  The company also continues to develop it's AI processors, including Inferentia and Trainium. 
 
Risks of investment are always present with any company stock and Amazon is no exception. There is still no certainty that the U.S. economy will be able to have a soft landing or avoid a stark recession in the next several months to year or so, despite showing exceptional resiliency thus far.  Amazon also has cloud competition from companies such as Microsoft and Google.

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Thank you for reading and feel free to comment on this blog.  

Disclaimer: This blog has been created for sharing my personal investment ideas only. I do not receive any compensation for this blog or the content within. I am not an investment advisor or professional. This blog is my own personal opinion and is not meant to be a recommendation of the purchase or sale of any stock or ETF. Please do your own due diligence and research before deciding to purchase any investments of your own.

 

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