FinTrust Brokerage Services Equity Research
Sept 4, 2018
*Please see important certification and disclosure information at the bottom of this page.
*Please see important certification and disclosure information at the bottom of this page.
Industry: Wholesale Distribution
GICS Sector/ Sub code: Electrical Apparatus and Equipment / 5063)
Company Summary: Founded in 1994, Amazon.com opened its virtual doors on the World Wide Web in July 1995. Fortunately for earthlings, Amazon seeks to be “Earth’s most customer-centric company (Source AMZN 10-k),” however, this leaves the rest of the universe open to competition and non-earthlings subject to non-customer-centric predators. Amazon.com clearly faces competition in the “Middle Kingdom” of China from Alibaba, and we sincerely look forward to the space race between Jeff Bezos’s Blue Origin, Richard Branson’s Virgin Galactic, Elon Musk’s SpaceX, and Paul Allen’s Vulcan Aerospace. We believe it will capture the public’s attention in the 21st century in a manner similar to the early automobile and airplane industry races of the early 20th century. In addition to its investments in drone technology, Amazon.com operates across five segments: consumers, sellers, developers, enterprises, and content creators and provides advertising services and co-branded credit cards. Conventionally, or terrestrially, the company can be said to operate across retail, logistics, consumer technology, cloud computing, media and entertainment, and increasingly, artificial intelligence.
Analysis by Allen Gillespie, CFA®, (917) 679-6335 and (864) 288-2849
Fintrust Rating: SELL
Target Price: $1,111
Current Share Price $2012.71
Expected Return -44.8%
52 Week Price Range $931.75 – $2022.38
Fintrust Brokerage Services, LLC rates companies a BUY, HOLD, SELL, or SHORT.
Key figures pricing data reflects previous trading day’s closing price. Other applicable data are trailing 12-months unless otherwise specified.
Our conclusion, recommendation and risk assessment remain the same as in our previous report which is reprinted below.
As recorded by Washington Irving, John Law’s “System” eventually collapsed as “capitalist gradually awoke from their bewilderment” in the system which was designed to “depreciate the value of gold and increase the illusive credit of paper” (short gold, long high yield anyone?) and they began to seek “something real.” As a result of this awakening, capital began to be “carried out of the country” (anybody notice the start of the rebound in international equities in 2017?) and the “very compulsory measures that were adopted to establish the credit of the bank hastened its fall, plainly showing there was a want of solid security” (do you have foreign currency, metals or cryptos?).” Eventually, Law was forced to reduce the value of the bank’s notes by one-half and the shares of CDO fell from 9000 to 5000 livres.. While the bank notes were restored to their full value, Irving reports that “government itself had lost all public confidence equally with the bank.” (any chance of a collapse in political confidence?)
In turn, this failing of confidence in government, led to a massive hyperinflation as paper money was refused. Irving reports that jewels, precious stones, plate, porcelain, trinkets of gold and silver, all commanded any price, in paper while land was bought at fifty years’ purchase… Monopolies now became the rage among the noble holders of paper” (got your FANG stocks?) Law was forced to flee France and Irving quotes Voltaire as saying, “He was a quack to whom the state was given to be cured, but who poisoned it with his drugs, and who poisoned himself.”
Our $1,111 price target reflects Amazon.com potential growth rate, strong balance sheet and ability to internally finance acquisitions, historic generation of steady gross margin and other financial metrics, but given its modestly unattractive valuation, we believe that AMZN is appropriate at lower valuations for a long term holding for risk-tolerant investors. Acqusitions, if chosen correctly and integrated successfully, add scale and scope in an industry that rewards both attributes, and could potentially drive share value higher than our estimate, whereas competition could compress margins. Given our review of the company’s historic operating and financial results, we rate management as highly capable, and focused.
Risk include, but are not limited to, greater competition for AWS from other technology companies, anti-trust, political and business uncertainty, F/X fluctuations, the failure to successfully integrate acquisitions, and increased operating cost for a larger proportion of sales. Finally, we believe the stock market as a whole and the value of nominal price generally could be volatile as the system of quantitative easing collapses.
We performed a DCF evaluation of AMZN based on our 10-year forward earnings forecast, which is summarized in the preceding table. Our key assumptions are that (1) AMZN’s Cost of capital is 10.6% and that (2) the Company’s discounted Terminal Value is driven by an assumption of 26.0% ongoing revenue growth. Our model indicates that the shares’ target price is $1,111, or 44.8% downside. As the following Share Price Matrix illustrates, the target price is sensitive to very modest changes in WACC or perpetual unlevered free
cash flow growth rate assumptions.
Analyst Certification: We hereby certify that the views expressed in this research report accurately reflect our personal views about the subject company and its securities. We also certify that we have not, will not, nor are presently receiving direct and/or indirect compensation in exchange for any specific recommendation in this report. In addition, said analysts have not received compensation from any subject company in the last 12 months.
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An analyst or a member of his household may not purchase the securities of a subject company 30 days before or 5 days after the issuance of the research analyst’s report or a change in ratings or price targets, trade inconsistent with the views expressed by the research analyst, and all transactions in the subject company (ies) securities for the research analyst’s personal trading account must be approved.
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At the time of this report, Mr. Gillespie owns bitcoins, ether, and other cryptocoins, Alphabet shares, and has exposure to various gold and silver related investments including gold mining shares, metals, long volatility, and international equity related mutual funds and ETFs.
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