There is a deep love for Amazon on Wall Street. An obsession of sorts. Of the 50 analysts who follow Amazon and provide recommendations, 48 rate the stock a buy and 2 call it a hold.
Not a single soul on Wall Street is brave enough to tell you to steer clear of the shares.
Morgan Stanley (MS) was the latest big bank to publicly profess its love for the internet retailer. Yesterday, MS upgraded its price target on Amazon by a massive 35% to a Street high of $2,500 per share. That upgrade comes on the heels of a July upgrade from MS that brought the price target to $1,850. Has Amazon’s business changed that much over the last month?
The MS note helped Amazon shares rise more than 3% yesterday. The 3% price increase is the equivalent of more than a $30 billion gain in market value.
So in one day, Amazon created $30 billion worth of shareholder value (or at least investors gave it credit for doing so).
That’s more than the market value of 124-year old Hershey Company, more than the market value of KFC and Taco Bell parent Yum Brands, more than Weyerhaeuser (the largest private land owner in America with 13 million acres), more than Kroger (America’s biggest grocery store owner), and about the same size as State Street—one of the biggest custody banks in the world.
Not bad for a day’s work Mr. Bezos.
The bulls have been right on Amazon for the last few years so good for them. But just because something has gone up, doesn’t mean it was a sound investment to begin with. Speculators have to make money sometimes too.
The problem that is becoming increasingly obvious with Amazon and other large FAANG stocks, is the Street still seems to be treating these firms as if they were small companies with decades of rapid growth ahead.
That is no longer the case.
Amazon is projected to do $234 billion in sales this year. From a sales base of $250 billion, it took Wal-Mart more than a decade to double sales.
Amazon may have an easier time than Walmart in maintaining rapid sales growth, but we are talking colossal numbers. There are only four other companies in the S&P 500 with sales of $234 billion or more. But based on the growth projections from analysts, Amazon will create another Apple sized company in terms of revenue over the next two years.
Sounds like a tall order, even for the impressive Mr. Bezos.
At some point shouldn’t Amazon run into the formidable force that is the law of large numbers?
That’s where the conservative investor’s money should be today.
Jeremy Jones, CFA
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