Amazoncom Inc. (NASDAQ:AMZN): All You Need Is Growth?

There's no stopping the Amazoncom Inc. (NASDAQ:AMZN) growth train, with analysts forecasting high top-line growth in the near future. But the risk I see is around whether the company's recent financial position is sustainable given the way it currently manages its capital. In addition to this, it seems like the market is overly optimistic about the business, with its current share price of US$1,431.42 hovering above its fair valuation. I will conduct a high level fundamental analysis on the company by looking at its past financials and growth prospects moving forward.

First, a short introduction to the company is in order. Amazon.com, Inc. engages in the retail sale of consumer products and subscriptions in North America and internationally. Founded in 1994, it currently operates in United States at a market cap of US$724.73B.

The company is growing incredibly fast, with a year-on-year revenue growth of 30.80% over the past financial year , and a net income growth of 27.92%. Since 2013, revenue has risen 20.41%, concurrent with larger capital expenditure, which most recently reached US$11.96B. With continual reinvestment into business operations, a return on investment of 24.84% is forecasted for the upcoming three years, according to the consensus of broker analysts covering the stock. Net income is expected to increase to US$4.14B in the upcoming year, and over the next five years, earnings are predicted to rise at an annual rate of 37.02% on average, compared to the industry average growth of 32.26%. These figures illustrate AMZN's strong track record of producing profit to its investors, with an efficient approach to reinvesting into the business, and a buoyant future compared to peers in the sector.

AMZN's financial status is a key element to determine whether or not it is a risky investment - a key aspect most investors overlook when they focus too much on growth. Alarm bells rang in my head when I saw AMZN's high level of debt, which has been increasing over the past five years, exceeding its total level of equity. However, cash generated from its core operating activities makes up a decent portion of debt (0.42x), and it generates enough earnings to cover its annual interest payments. But there's still room for improvement on the debt level front, which could be lowered to a more prudent amount. The current state of AMZN's financial health lowers my conviction around the sustainability of the business going forward. AMZN has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. AMZN has managed its cash well at a current level of US$30.99B. However, more than a fifth of its total assets are physical assets and inventory, which means that in the worst case scenario, such as a downturn or bankruptcy, a significant portion of assets will be hard to liquidate and redistribute back to investors.

The current share price for AMZN is US$1,431.42. At 484.11 million shares, that's a US$724.73B market cap - which is too high, even for a company that has a 5-year cumulative average growth rate (CAGR) of 20.64% (source: analyst consensus). With an upcoming 2018 free cash flow figure of US$17.38B, the target price for AMZN is US$650. This means the stock is currently trading at a massive premium. Also, comparing AMZN's current share price to its peers based on its industry and earnings level, it's overvalued by 426.75%, with a PE ratio of 227x vs. the industry average of 43.01x.

If you're thinking about buying AMZN, you have to believe in its growth story, which is a strong one. However, my main reservation with the company is its financial health, as well as the possibility that it is currently overvalued. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I've taken my data from.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.