Amazon is just getting started, this portfolio manager says

The stock may have flattened over the past year and a bit but the growth trajectory is still huge for Amazon (Amazon Stock Quote, Charts, News, Analysts, Financials NASDAQ:AMZN, 아마존 주가), says portfolio manager Gordon Reid, who just labelled Amazon as one of his Top Picks for the 12 months ahead.

“Amazon is really coming into their own from a stock standpoint,” says Reid, president and CEO of Goodreid Investment Counsel, speaking on a BNN Bloomberg segment on Thursday. 

“For a number of years, we watched it from the sidelines thinking that it was just a little bit too rich for us and there wasn’t enough visibility. That’s changing and they’re right at the same lifecycle stage that perhaps Google was when we first bought it or Facebook was when we first bought it, and we’re very excited about it,” Reid said.

Amazon was an early pandemic winner as the market took a shine to the e-commerce behemoth during last year’s work- and shop-from-home restrictions. But the stock has gone practically nowhere since August of 2020 and has been bopping around the $3,300 per share mark ever since. 

The company recently delivered third quarter 2021 results which showed slower than expected growth on both top and bottom lines. Amazon’s net sales grew by 15 per cent to $110.8 billion while net income dropped by about half on a year-over-year basis to $3.2 billion, represented in EPS as $6.12 per diluted share compared to $12.37 per share a year earlier. Free cash flow dropped to $2.6 billion for the trailing 12 months compared to $29.5 billion for the 12 months ended September 2020. The top and bottom numbers came under the $111.6 billion in revenue and $8.92 per share in earnings expected on average by analysts. (All figures in US dollars.)

The culprit for the slower growth was said to be a return to bricks and mortar stores this fall compared with last year’s pandemic-induced online shopping. Amazon accounted for the lower earnings by pointing to capital investments made over the quarter.

“We’ve always said that when confronted with the choice between optimizing for short-term profits versus what’s best for customers over the long term, we will choose the latter—and you can see that during every phase of this pandemic,” said Andy Jassy, Amazon CEO, in an October 28 press release.

At the same time, the look ahead was also muted with Amazon calling for fourth quarter sales growth between four and 12 per cent for the all-important holiday season. That number was also lower than the consensus expectation of around 13 per cent growth.

But Reid thinks investors should take a wider lens to Amazon.

“Andy Jassy has taken over from Jeff Bezos as the CEO, and they’re going to hire 275,000 people by the end of the year. They’re spending $25 billion a year to develop new opportunities for success and growing very dramatically in the e-commerce space,” Reid said. “Also, AWS, which is the cloud offering, is the largest in the world. Last quarter it grew by 39 per cent year-over-year. So there’s a lot to like here.”

“We think now is the time. The stock has gone flat probably for a little over a year. [It’s] a good time to get on board, and we think that there’s significant capital appreciation potential here with probably a 30 per cent growth trajectory annually for earnings,” Reid said.

This week, Goldman Sachs named Amazon as its best idea for the Internet space in 2022, saying the company is exposed to a number of secular growth themes in e-commerce, advertising, cloud computing, media consumption and consumer subscription adoption. Goldman analyst Eric Sheridan gave Amazon a “Buy” rating and $4,100 target price, which would represent a 16 per cent projected return.

Year-to-date, Amazon is up about 14 per cent, with the stock having made solid gains over the past few weeks. AMZN delivered a return of 76 per cent in 2020 and is currently up almost 400 per cent over the past five years.

“There was certainly some pull forward effects on e-commerce that we all saw and that benefited Amazon in the early days of the pandemic. And I think the markets sniffed out the fact that the e-commerce numbers were going to be a little bit light, which is exactly what’s happened,” Reid said. 

“But we think that’s very much temporary. They’re spending a lot of money on thousands of new fulfillment centres, and we think we got our packages in a quick manner before — it’s just going to be shocking how quickly we’re going to get things at our doorstep in the future,” he said.

“So they’re really the leader in e-commerce and they’re going to stay there,” Reid said. “A 30 per cent annual growth rate, that’ll bring a multiple down very quickly, even with very good capital appreciation.”