Grain: The Next GameStop?

transformation, the volatility of the stock (as measured by the 30-day implied volatility) has become more and more subdued, such that Amazon seems utterly placid compared to its earlier incarnation.

Another way to view this same sea change is by way of a trio of moving averages: the 50-, 100- and 200-day exponential moving averages are shown in Amazon, right, without the price data for the sake of easy viewing. The dynamism and gyrations of these lines have, year-by-year, become much calmer, with only market-wide shocks like the February/March 2020 COVID19 plunge sending tremors into an otherwise placid ascent to ever-increasing prices.

Monster gains elsewhere

Examining Amazon’s history—its giant ups and its stomach-turning downs—provides some comfort for any who missed the boat (which is about 99.999999% of humanity). Virtually no one who had the foresight and courage to put money into this upstart in May of 1997 would have held on for the duration. It would be interesting to know what percentage of retail buyers in March 1997 still have the stock, but it’s an extremely small number.

The stock’s more recent performance doesn’t match its stellar past. It’s still highly valued and rather expensive based on any traditional fundamental metric. Anyone seeking multi-thousand percent gains had better look elsewhere because the glory days of Amazon are surely behind it. It’s easier for a $10 million company to grow 2,000-fold than it is for a $1 trillion company. There simply aren’t enough people on the planet to buy socks and air fresheners to create that kind of marginal growth.

Perhaps the biggest lesson to learn from Amazon is that the saying about “no such thing as a free lunch” applies to long-term, life-changing investments. It’s easy to look back at the fantastic gains, but to actually enjoy those gains, one has to be practically blind, deaf and dumb to the dreadful fluctuations endemic to a high-growth, high-risk stock. Human nature does not lend itself well to that kind of behavior, but for those blessed with bravado and faith, the rewards have been unfathomably large.

Tim Knight has been using technical analysis to trade the markets for 30 years. He hosts Trading the Close daily on the tastytrade network and offers free access to his charting platform at slopecharts.com.

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EQUITIES TIMELY VIEWS ON STOCKS IN THE NEWS

Prime Numbers

By Emma Muhleman

espite surprisingly strong recent earnD ings, stock in Amazon (AMZN) has softened over the past nine months after surging in the early months of COVID-19. The company faces tough comparisons against calendar year 2020 because many brick-andmortar retailers closed during the pandemic and consumers switched to e-commerce amid a national lockdown. Deeper analysis of the company’s first-quarter results suggests the stock should continue to outperform.

Amazon’s cloud-computing and software as a service (SaaS) segment, Amazon Web Services (AWS), drives the company’s free cash flow and is key to the long-term performance of the company’s stock.

AWS benefits from a first-mover advantage in the cloud-services business, with a multi-year head start against the competition. Relentless innovation at AWS has also helped it maintain a sizable market-share advantage.

Only two companies have the scale, expertise and operating leverage to compete with AWS in the cloud business, namely Microsoft (MSFT), via its Azure segment, and Alphabet (GOOGL), through Google Cloud Services. But neither has been able to close the gap and catch up with AWS’s leading market share.

The consensus among market research firms puts AWS’s market share at or above 30%, with Microsoft and Google trailing far behind with roughly 20% and 7%, respectively. Both companies have focused heavily on growing their cloud businesses during the past five or more years, yet their heavy capital investment and attempts to take share from AWS have been largely unsuccessful.

Since its inception, AWS has been a cash cow, supporting Amazon’s rapid expansion of the e-commerce business domestically and abroad. In the first quarter of this year, AWS’s outperformance illustrates the strong moat it enjoys in this high-growth, highly profitable segment.

AWS’s sales growth accelerated in the first quarter, with quarter-on-quarter growth of 6% (relative to Q4 2020) and year-on-year growth of 32%, bucking the trend of decelerating growth at its competitors Microsoft and Google.

AWS saw strength across the board during the first quarter, with management reporting growth in new contracts with small-tomedium-sized businesses, in addition to new contracts with several large enterprise customers.

AWS sales typically rise in the fourth quarter, making quarter-to-quarter comparisons in Q1 seasonally weak. But in 2021, AWS quarter-on-quarter dollar sales almost tripled (at $761 million) versus the first quarters of 2020 ($265 million) and 2019 ($266 million), respectively. Finally, the AWS backlog continues to grow, up 55% year-on-year, outpacing the growth in Q1 reported revenue.

Advertising revenues also drive Amazon’s cash earnings, posting a third consecutive quarter of accelerating growth, up 73% in Q1 of this year, against an impressive 68% yearon-year growth in the fourth quarter of 2020.

For the reasons highlighted here, weakness of late in Amazon stock represents a buying opportunity. The company’s true value is best approximated with a sum-of-the-parts valuation, given its diverse operations. SaaS businesses command trading multiple orders of magnitude larger than companies in the retail or e-commerce businesses (e.g., Autodesk (ADSK) trades at 54x trailing 12 months earnings per share (TTM EPS), while Walmart (WMT) sports a multiple of roughly 30x TTM EPS).

Comparing 2021 Q1 revenues to operating income (see below), it makes sense to value Amazon Web Services and Amazon’s direct advertising revenues separately from its e-commerce retail operations. Applying a 20x multiple to the JP Morgan 2022 AWS estimate of earnings before interest, taxes and amortization (EBITDA) ($38 billion), a December 2021 price target of $4,600 is firmly within reach.

Emma Muhleman works as a long/short equity analyst specializing in forensic accounting at Ascend Investment Management. @emmamuhleman1

Amazon Web Services (AWS) Drives Earnings Beat

Amazon revenues and operating income by segments (in millions).

2021 Q1 REVENUES 2021 Q1 OPERATING INCOME

AWS

$13,503

International e-commerce

$30,649

North American e-commerce

$64,366

Amazon Web Services

$4,163

North American e-commerce

$3,450

Intl. e-commerce

$1,252