Amazon Stock is ON SALE After Earnings

Amazon stock is down 9% today after earnings, I think this has created a great buying opportunity. I believe the crash is unjustified for the following reasons:

Total revenue grew 10% despite the sheer size of the company. Amazon’s revenue has never decreased for a single quarter in the past 10 years, this suggests the existence of strong economic moats.
AWS continues to grow rapidly at 19% despite being the largest cloud provider
TTM free cash flow increased significantly to $53.0 billion, up from $7.9 billion last year. This is a really good sign, and I expect the FCF to continuously grow rapidly as Amazon continues to optimize its profitability.
All high-margin business segments are growing rapidly in double digits. The third-party seller services, advertising, subscription and AWS grew 12%, 20%, 10% and 19% respectively.
Share based compensation (dilution) is under control, increasing only 3% from a year ago.

The estimated fair value of the stock is $243, while it is currently trading at $167.9, suggesting a 40% discount from its fair price and a potential 18% CAGR over the next 5 years. I’m using operating cash flow (OCF) instead of free cash flow to value AMZN because the company tends to allocate a significant portion of its free cash flow to capital expenditures (spending on the warehouses, supply chains, cloud infrastructure, etc.). Historically, Amazon’s capex has been extremely effective, as reflected in the rapid revenue growth across all business segments.

Here are the metrics used in the DCF calculation:

Latest TTM OCF $107.95 Billion
OCF growth rate of 15% (5YR AVG 24.54%)
Share dilution of 1.26% per year (5YR AVG 1.26%)
Future Price/OCF ratio of 20 (5YR AVG 25.4)
Discount rate of 10%

I have already increased my AMZN position today and I plan to buy more if the stock continues to trade lower.

If you are interested in how I value stocks using the DCF model, be sure to check out this recent video where I walk you through the process step-by-step: https://youtu.be/flzfqXZBxNg

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DISCLAIMER: This post is the author's personal opinion only and none of it should be considered financial advice.