Is Amazon Still a Buying Opportunity?

Amazon.com (AMZN) announced third quarter ended September 30, 2015 net sales of $25.4 billion, up 23 percent year-over-year from $20.6 billion during the same period last year. The company has also provided net sales guidance for fourth quarter of 2015 and estimates it to be in the range of $33.50 billion to $36.75 billion, or to expand in 14% to 25% range as against fourth quarter of 2014.

Amazon declared third quarter of 2015 net income of $79 million or $0.17 per diluted share compared to a net loss of $437 million or $0.95 of diluted loss per share in third quarter of 2014.

The key online retailer reported continued year-over-year expansion in both its top line and bottom line growths primarily due to notable increase in online sales for the quarter as the global economies steadily recover from the continuing slowdown, driving impressive company growth.

Impressive growth            

The year-over-year adjusted net sales expansion of 30% for Amazon is driven by continued accumulation of cash by customers with gradually improving global economic conditions driving increased wages and thus, encouraging customers to spend more and shop online, benefiting the online retailing giant.

Amazon has witnessed a slight 8 percent sequential decline in consolidated segment operating income to $993 million in third quarter of 2015 compared to $1.075 billion in second quarter of 2015 and a notable year-over-year growth from consolidated segment operating loss of $136 million in third quarter of 2014.

The online retailing major is believed to significantly benefit from the rising consumer demand for online products and services being mainly driven by the continued improvement in international economic scenario which is estimated to remain till the global economic cycle repeats itself.

Amazon is increasingly delivering on its commitment to generate significant free cash flows which are steadily growing and uniquely optimize its free cash flows as a long-term objective.
In addition, the retailer is efficiently managing share dilution to execute on its continued commitment to deliver improved shareholder returns.

The online retailer declared third quarter of 2015 consolidated number of common shares outstanding and shares allotted for stock-based compensations of approximately 489 million as of September 30, 2015, against 481 million shares allocated last year.

Making smart moves

Amazon is keen on optimizing its balance sheet by minimizing the non-core expenditures while growing free cash flows through enhanced quarterly sales being supported by the gradually improving global commodity demand and pricing environment. This unique strategy of enhancing free cash flows has primarily allowed the company to timely introduce stock repurchase programs, delivering enhanced shareholder returns.

The online retailing company strategically launched four innovative tablets that include Fire, Fire HD having tablets in two sizes and affordable Fire Kids Edition tablet. Amazon also launched three unique Fire TV devices, all having Alexa integration along with the introduction of Fire TV Stick and Fire TV for key Japanese customers, providing simple, quick access to Video Market, Niconico, YouTube.com, Netflix, GYAO!, Hulu, Amazon Video, Prime Video, and several others.

Amazon is believed to be the second-to-top performer in the complete S&P 500, illustrating significant returns of 115% year-till-date. This mind-boggling company performance is primarily driven by its remarkably outperforming enterprise-facing cloud-computing segment, the Amazon Web Services which according to Gartner has superior cloud server capacity of nearly 10 times the closest 14 opponents combined, with nearly five times the storage room of these competitors with significant further room to grow.

The introduction of new products online and notable customer traction for Amazon Web Services is forecasted to deliver continued and sustainable top line growth for the company, encouraging it to offer attractive shareholder returns.

Conclusion

Overall, the investors are advised to “Hold” their position in Amazon.com, Inc. considering the company’s excessive overvaluation with trailing P/E and forward P/E ratios of 849.57 and 104.59 respectively compared to solid industry’s average P/E of 39.08. The PEG ratio of 5.22 seems satisfactory and comparable to the industry’s growth average of 0.48, indicating healthy company growth. The profit margin of 0.33% is extremely nominal. Further, Amazon is debt-burdened with significant total debt of $18.59 billion against weaker total cash position of $14.43 billion only, restricting the company to make future growth investments.
Published on Jan 19, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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