First published on Simply Wall St News
Amazon.com, Inc. (NASDAQ:AMZN) is getting stress tested as the stock erases the gains it made in the last 12 months and is currently some 3% in the red. Given that there is a lot of volatility in markets at the moment, we will step back and re-evaluate the fundamentals.
For investors, it is important to have a clear picture of the performance of a company, especially during uncertain times. That way, we can be more confident that a stock can regain whatever was lost in the short term.
We start our analysis by looking at how much and now efficiently Amazon grew in the last 12 months.
For a mega cap like Amazon, even their long term performance has been extraordinary. Some investors think that in crises “the strong get stronger”, and while it is not a rule, it does ring true for Amazon. In the last 5 years, Amazon.com, Inc. has increased its revenue by 245.5%, going from US$136b in December 2016 to US$469.8b in December 2021.
This amounts to a CAGR of 28.1% over that period.
Last year, the company’s revenues increased by 21.7%, which is less than the 3-year average growth rate of 28.2%. Albeit slightly, this is a sign that growth seems to be decelerating. Given how much the company is reinvesting, this seems to be within the expected fundamental growth rate of 14%, indicating that this growth is sustainable.
Fundamental growth is the long term growth we expect to see, based on how much and how well management reinvests in a company. Think “spend money in order to make money” – cliché but true.
View our latest analysis for Amazon.com
There are 2 more things we will go through when evaluating the quality of growth. These are COGS and total cost scaling. This essentially shows us if the company is reducing costs as it grows.
We look at how growth scales in relation to the costs of producing the product or service. In this regard, we take the last 12-month revenue growth and subtract the growth of costs in the same period. Amazon actually grew revenue -1.6% less than costs of goods sold, but this is considered noise since the percentage is so low.
Looking at gross margins across time, we see that Amazon has a 42% margin, which has been steadily growing over time. The company may still be prioritizing high growth before they intensify cost economics.
While growth vs. costs …….