If you’re going to throw down your money on a stock right now with no hesitation, you’ll want to be sure it’s a money-maker. The first thing it must possess is a wide economic moat that ensures competition or capital can’t dethrone it. Here’s a quick flashback in time to highlight what we mean.
A few decades ago, Richard Branson had the audacious plan to disrupt Coca Cola but failed miserably. The brand advantage of Coke was simply too strong to dislodge in consumers’ minds, no matter how much capital was thrown at the new initiative.
A company with a moat so wide that a competitor can’t breach it even if they spend mountains of capital is exactly what you want.
So, what monster stock meets this high hurdle?
Amazon is down an astonishing 40% over the past twelve months on fears that inflation will hurt the spending power of consumers and an overall economic slowdown. But take a look at how Amazon has grown year-over-year and you will see a surprising fact.
In 2021, Amazon revenues for the four quarters were as follows:
- Q1: $108 billion
- Q2: $113 billion
- Q3: $110 billion
- Q4: $137 billion
With the stock down 40%, you might assume the past year has been a tough one for Amazon. But the top line paints a different picture.
In 2022, revenues were:
- Q1: $116 billion
- Q2: $121 billion
- Q3: $127 billion
- Q4: $149 billion
Every quarter had year-over-year gains versus 2021. So if the top line grew why did the stock drop?
In a nutshell, net income plunged over the twelve month period. Here are the same figures in 2021 for net income:
- Q1: $8.1 billion
- Q2: $7.7 billion
- Q3: $3.1 billion
- Q4: $14.3 billion
And here they are for 2022:
- Q1: -$3.8 billion
- Q2: -$2.0 billion
- Q3: $2.8 billion
- Q4: $278 million
So, year over year net income plunged from $14.3 billion to $278 million.
Perhaps the greatest concern was that the massively profit-generating AWS division top line slowed year over year too from 40% in Q4 2021 to 20% in Q4 2022. That AWS division inflates Amazon’s overall margins versus its low margin e-commerce division, so if it’s on the decline concerns grow that Amazon as a whole will be sledding uphill for some time. But Amazon is aware of the changing tides and has already chopped 18,000 employees to save on costs with another 9,000 due for layoffs.
From a valuation perspective, Amazon is looking attractive now that the share price has been cut so severely. 49 analysts have a consensus target of $137 per share on the stock, which would translate to 42% upside from current levels.
The Amazon Moat
Beyond management’s cost cutting initiatives and the valuation argument, the #1 reason to buy Amazon is its ever-expanding moats. It’s virtually inconceivable to imagine a company disrupting Amazon at this point in e-commerce. There were reportedly 157 million Amazon Prime users in the US in 2022. That means almost every US household has Prime. It’s a near insurmountable challenge for any company to compete at scale with Amazon, which continues to add ever more perks and benefits to Prime members.
And in AWS, any business owner who relies on AWS knows the friction to leaving is sky high. That translates into revenues virtually in perpetuity. As long as the business stays viable, they will stick with AWS. That in turn gives AWS pricing power similar to Apple’s iPhones. Just as consumers cannot give up their phones, business owners who rely on AWS cannot easily switch without incurring enormous friction.
Even without all the optionalities Amazon possesses, these two primary businesses alone will support Amazon for years to come. That makes for a compelling stock to buy for the long-term.