hi i'm jimmy in this video looking at
amazon stock ticker symbol amzn so the
goal of this video is to look quickly at
amazon's business then we're going to
look at some recent developments
specifically some headwinds that the
company appears to be facing and then
finally we're going to try to come up
with a fair value for amazon stock using
discount of free cash flow now before we
jump into our amazon analysis i just
want to tell you about a website that
we're almost done building we've been
saying it'll be ready by the end of june
we're now in june and it should be done
any week now but basically the point of
this website the early phases of the
website is you can punch in the ticker
symbol of the company that you're
interested in the website will then pull
down estimates for free cash flow from
analysts so it'll automatically pull
down analyst estimates for free cash
flow it'll calculate the fair value of
the stock using discount of free cash
flow for me i'm using a required rate of
return of seven and a half percent but
of course you can customize that to use
whatever you want or you can use the
company's own weighted average cost of
capital the goal of this website is to
make it quick and easy to come up with a
fair value for stocks to see which
stocks we should do a deeper dive on and
then if it's a stock that you like and
you do the research this website is
there to help you come up with where you
should buy it at what point should you
consider investing in the stock below
what price so if you'd like to sign up
for this website the advantage to
signing up before the website goes live
which should again be any week now but
the advantage of signing up before it
goes live is we are locking in the price
indefinitely so the price will never go
up on you if you sign up before the
website goes live so again a link in the
description below okay now we're gonna
jump back to our amazon analysis and
we're gonna kick it off with amazon's
business segments so their largest
segment is clearly their online stores
business this is exactly what it sounds
like amazon.com
their online store business related to
that is their third-party seller
services which if you are a retailer if
you sell products you can sell products
on amazon and they get a cut of that
that is where that revenue comes from by
the way this revenue is this breakdown
of percentages is based on the most
recent completed year which is 2021.
okay then we have aws aws is short for
amazon web services that accounts for
about 13
of their overall revenue now this is an
important segment because one this is
their fastest growing segment but also
it's a segment that generates the
highest margins for them so in time this
segment's going to get more and more
important i just want to bring that out
okay then we have subscription services
which is account which accounts for
about seven percent of their total
revenue after that is their advertising
services business and this is where
those third-party sellers that i
mentioned before people can advertise on
the website and of course amazon is able
to generate some revenue from that
finally we have their physical stores
now of course their physical stores
aren't nearly as prevalent as their
online business but it is a growing part
of their business so i would expect to
see this revenue ramp up in coming years
as well okay so now let's jump over to
some recent developments so one of the
biggest recent and i think this is one
of the most important recent
developments for amazon's business is
their current excess capacity when we
look at this chart here well this is a
chart of their total square footage of
the total square footage that amazon
controls ultimately in their
distribution network and we can see that
in the past two years specifically from
2019 to 2021
mostly due to covid and the excitement
of round cover were the issues with
covid and the limited capacity that they
had well amazon really ramped up their
total capacity
the problem with that is that they
ultimately went too far with it they
built too much capacity to the point
that they ended up with excess capacity
so one of the problems with this is this
leads to lower profit margins when we
look at their you know the excess
capacity they have to pay for square
footage that one they don't need and
they're not using right now now this is
i believe a short-term problem because
they will their the company is growing
quick enough that they will grow into
that capacity but in the near term this
is affecting their overall numbers in
fact if we look at some quarterly
numbers for this is their their net
profit margins what percentage of
revenue has turned into profit well we
can see in the past few quarters these
past three quarters here
profit is down part of the reason for
that is because they were building
excess capacity and they have to cover
the cost for that capacity but over the
long run i do expect for them to
gradually grow into that so where this
is a net negative now over the next
couple years a lot of that should shake
itself out and i would expect for them
to continue
their
their improving profit margins which it
was clearly doing before this whole
downtick happened that being said
another development out of the most
recent earnings report is the loss the
right down that they took in their
rivian investment so amazon owns a piece
of rivien which is a publicly traded
electric vehicle company and
the issue with that is that as the stock
rivian stock moves up and down they take
basically gains and losses based on how
that stock moves
not the most recent quarter but the
quarter before that they had a huge gain
because the stock was up this most
recent quarter this stock pulled back so
they get a huge write down but this is a
big deal because if you look at their
their on the books earnings their u.s
gaap earnings earnings per share was
negative seven dollars and 56 cents but
if you were to remove the rivian
investment if you were to make the
necessary adjustments as we should do
any time we're analyzing a company we
should remove these non-operational
investments on these non-operational
expenses
and what we do is when we remove that
well we end up with a positive earnings
per share of 4.24 cents that could
easily be converted over into net income
net income is just net income earnings
per share is just net income divided by
the shares outstanding and when we look
at this chart of their net income going
back to 2007 well we can see in the past
few years again these are this is an
adjusted chart so we've excluded the
ribbing investments both on the positive
side and on the negative side and any
other one-time write-offs or write-ups
or write-downs that they might have
ignoring that we can see that their
profit has really ramped up nicely in
recent years these are annual numbers
okay that being said let's look over at
amazon's revenue which really shows how
quickly amazon's revenue has been
growing
but one concern about their revenue is
that revenue although it is growing
big jump in 2022 it is expected that
revenue growth will gradually decline so
it won't it'll still grow just not as
fast
okay now before we jump over to the fair
our fair value calculation for amazon
stock let's look quickly at their shares
outstanding so this is a chart of amazon
shares outstanding once again going back
to 2007. so the first thing we may
notice is that shares outstanding over
the past two decades or so 15 years 15
20 years whatever it is have gradually
drifted higher now amazon does have a
buy back program and they have done some
stock buybacks but amazon also has many
of their employees management people
that work in the company get stock
options oftentimes those stock options
add to the shares outstanding which is
why we would gradually see an increase
in the number of shares outstanding that
they have so this is something for us to
keep in the back of our mind although
i'm not sure it totally
sways whether or not we would invest in
the stock but it's not like they're out
there raising money because they need
excess capital they have the money
they're just paying out some of their
employees mostly in stock options okay
now let's switch over to our fair value
calculation for amazon stock using
discount of free cash flow
so the interesting part about amazon
right now is amazon's about to go
through a 20 for one stock split so
we're filming this video on friday
friday the day though friday before the
stock split which happens on monday
right now amazon stock midday is about
400 bucks per share so to account for
the fact that there's going to be a
stock split basically what we would do
is we would take the most recent stock
price divided by in this case divided by
20 since it's a 241 stock split but we
would also have to multiply the shares
outstanding by 20.
that's pretty much the only adjustments
that need to be made
because the fair value of the stock
shouldn't change just because there's a
stock split stock stock split doesn't
create any value it just shifts the way
it is for example imagine you had a
pizza pie and that pizza pie instead of
being cut into eight slices it was cut
into 10 or 15 or 20 or 30. well you're
not creating any new food you're just
changing how big each slice is
all this 21 stock split is doing is
divvying up the value of the company
into more individual smaller pieces
so what we've done is we've we've
adjusted this calculation to account for
the post stock split so if you're
watching this video anytime after the
stock split has happened this is the
fair value calculation we're getting
proportionally same as what it was
before we did the adjustment but right
now we have the fair value the current
stock price at about 121 dollars per
share the fair value is up at about 113
dollars per share so it looks like as of
right now amazon stock appears to be
slightly overvalued now what this
calculation does is it takes analyst
estimates for free cash flow
and we calculated additional years so we
went on a total of 10 additional years
we had the computer calculate at 10
additional years and during those 10
additional years we gradually decreased
how fast amazon stock was growing we
actually elected to do a 13 growth rate
which is when we look at the revenue
growth in recent years well it's on the
more conservative side one of the
reasons i want to be more conservative
here is that in recent years amazon's
free cash flow hasn't been terribly
consistent now as they get larger and
they are able to generate more free cash
flow i would expect their free cash flow
to get more consistent but i wanted to
take a slightly more conservative
approach and using this conservative
approach again the stock looks slightly
overvalued so for me i like amazon's
business i like what they're doing i
think they're going to grow into their
capacity and over the long run i think
amazon's business will do very well i'd
like to see personally for this stock to
drop from about the 121 level down to
closer to 100 per share that would give
me a bit of margin of safety
below my 113 fair value calculation so
if we can get amazon stock to drop near
100 i'd be much more inclined to jump in
and buy that so in the meantime what i'm
going to be doing is although i'm not
going to buy amazon stock i am going to
add amazon stock to my bullpen that way
i can watch it and if the stock gets to
a good price i will happily jump in and
buy some of that with that being said if
you'd like to sign up to get access to
this website i will leave a link right
here i'll leave a link in the
description below and thank you so much
for sticking with me all the way to the
end of the video i really do appreciate
it thank you and i'll see in the next
video