By Jimmy Butts
From humble beginnings as an online book retailer, few companies have had more of an effect on the retail sector — indeed, the daily lives of all of us — than Amazon.com, Inc. (NASDAQ:AMZN). Today, it’s a $438 billion behemoth, selling just about any product imaginable.
That’s the cover story. But Amazon is much more than an online retailer.
We’re talking about a company with the analytical capabilities to know what its customers likely want even before they begin searching its website. We’re talking about warehouses strategically placed across the country, carefully stocked with inventory based on its vast databases — with workers increasingly replaced by more efficient robots — to ensure rapid fulfilment. (Soon, drones may replace delivery drivers.)
Its innovations in logistics alone are enough to fill a doctoral thesis.
And that’s just half the story. Amazon is also a game-changer in the media business, the advertising business, the cloud business, and the list goes on and on.
It’s for this reason I calls Amazon one of the “World’s Greatest Businesses.”
There’s just one problem. For years, Amazon has defied traditional investing logic.
Think about it. It’s one of the few “internet” companies that survived the dot-com crash relatively unscathed. Old-school, value-minded investors note that the company has basically never traded for what’s normally considered a “cheap” valuation on a price-to-earnings standpoint. For instance the stock sports a P/E of 185. If you come from Benjamin Graham’s school of value investing, this is enough to make you blush — if not outright sick to your stomach.
But those who focus solely on Amazon’s valuation — particularly the denominator (i.e. earnings) — are completely missing the point.
Amazon’s leadership isn’t out to produce earnings for shareholders each quarter. It’s hell-bent on taking over the world. To do that, it’s taking the gobs of cash it produces and plowing it right back into growing the business.
And so far, it’s working.
Forget About P/E Ratios
Now, I’m not asking you to become an Amazon fanboy in this essay. But what I am asking you to consider is changing your mindset about investing. Earnings, it turns out, aren’t always everything. They can be manipulated. Don’t believe me? Remember: Enron was earnings-positive for years leading up to its collapse. What it didn’t produce, however, was cash flow.
I’ve been preaching the merits of cash flow in Maximum Profit for years. One of our system’s two critical indicators are based on cash flow. The other is based on momentum — that is, knowing when it’s the right time to buy and sell.
Because of this, the Maximum Profit system is perfectly designed to answer the $64,000 question for a stock like Amazon: When is it a good time to buy?
Recently, the system gave us a simple answer: Right now.
I’m About To Go 3-For-3 With Amazon
That’s why, for the third time, I recently added Amazon to the Maximum Profit portfolio.
The first time I added this stock was at the end of August 2015, and shares surged over 30% in the ensuing four months, but the market pullback in February 2016 caused the share price of Amazon to fall quickly. Thanks to the Maximum Profit system we escaped with a slight gain, and the stock continued to drift lower.
I called the sudden selloff “superfluous,” and I knew that Amazon would likely be flagged by my system again. Sure enough, the next month my system flagged it as a buy one more time. In that issue I said, “I think shares will quickly pass the 52-week mark they set at the end of 2015 of around $696 per share.” Sure enough, a couple of months later the stock not only passed its mark, but continued to set new 52-week highs almost weekly.
Now once again my system is flagging the stock as a “Buy.”
This $438 billion company continues to defy logic. Its growth potential is undeniable. The company has expanded sales at a double-digit clip for over 17 years straight. What’s more, in 14 of the last 15 years the company has grown revenue by 20% or greater. Amazon easily outpaces other global e-commerce companies, suggesting that it continues to build market share while building a major competitive advantage.
On top of that, Amazon gushes cash. In 2016, the retailer pulled in more than $16.4 billion in cash flow, a 38% jump over 2015. That’s good enough to put Amazon in the top 30% of companies growing cash flow.
The bottom line is that Amazon is an incredible growth story that has plenty of tailwinds behind it in addition to its dominating e-commerce business. The company has built a formidable network effect with its convenience and recurring revenue of Amazon Prime, its expanding digital content library, electronic devices like the Kindle, Fire TV and Echo product, and its cloud storage Amazon Web Services. And right now, my system is telling me to pull the trigger once again on the company, where I’ll be looking to book my third consecutive gain from the online retailer.