Tony Mitchell is a well-known fund manager in the tech space. His tech mutual fund has outperformed the market for years. However, it has done so with a very interesting quirk—it has never held Amazon, until now that is. The reason why is that its P/E ratio always seemed to high at between 190 and 400. However, recently, Amazon’s P/E ratio has fallen back to earth. Its current ~80x is not cheap by any measure, except against its own history. The company’s web services division is growing strongly, its advertising business is surging, and it has a good foothold in the gaming industry. This means it could be a good time to pick up Amazon’s stock.
FINSUM: If you believe Amazon is going to continue its growth story, then right now does seem like an ideal time to pick up shares.
Amazon has had two rough patches following its last two earnings releases. The stock fell in October after its third quarter earnings release, and again last week after its fourth quarter numbers. December as a whole was a rough patch too. However, all this presents a good buying opportunity, says one equity research analyst. “Amazon typically experiences some downside follow-through over the day and week after a move lower on earnings, but over the next one and three months, these moves lower have presented very good buying opportunities”, says the analyst, from Bespoke Investment Group.
FINSUM: This is not arguing that Amazon is suddenly some kind of value stock, but if you are thinking of going long anyway, the current environment may represent a good buying opportunity.
There has been a lot of speculation lately, including by FINSUM, that Amazon might buy FedEx. FedEx’s share price could be considered cheap, and it would be a bold and strategic move if Amazon is actually committed to building its logistics business. However, Barron’s is today arguing that Amazon will never buy FedEx. The reasons why are two-fold. The first is that the 10.7x p/e ratio is not actually very cheap, and secondly, because Amazon does not really need FedEx’s capabilities, which have less to do with last mile delivery than they do with “upstream sorting”.
FINSUM: The real question here is whether Amazon wants to build up a logistics business in its own right, not just internal capabilities to serve its ecommerce business. If it does, then it is a smart acquisition. However, it would likely face significant anti-trust hurdles.
That is an eye-opening thought, is it not? Some investors and analysts are arguing that in light of FedEx’s stock being so beat up, Amazon should swoop in and buy the company. Amazon has been building its logistics operations for years, but buying FedEx could give it a big boost if it wants to become a shipping giant. One analyst summarizes it this way, “FedEx is inexpensive at 10.6x and 6.5x forward price-to-earnings and enterprise value to earnings before interest, taxes, depreciation and amortization multiples, respectively … Amazon could make an accretive acquisition of the best global network for a fraction of the cost of building it themselves”.
FINSUM: As mind-boggling as Amazon owning FedEx sounds, this idea appears quite logical and plausible.
Are you looking to find a good investment thesis for Amazon? Look no further than their growing private label business, which could prove a catalyst for expanding margins and share price growth. According to an analyst at Suntrust Robinson Humphrey, “The rise of private labels and exclusives is one of the least understood/most under-appreciated trends within Amazon”. He continued, “This strategy should strengthen the flywheel effect of proprietary offerings/better user experience/higher retention/spend/share gain, and should prove accretive to margins over time”. The profit margins on own-branded products are 7-15% higher than on other branded products.
FINSUM: Because of their huge user base, Amazon is in a good position to benefit from selling their own brand, as they have a ready audience. This will likely improve overall margins as the business expands.