AMZN Stock Forecast: Amazon’s Big Investment Year

Rebecca Jaffe is a Financial Analyst at I Know First. She graduated from the University of Texas in Austin with a BA in Economics.

AMZN Stock Forecast

“Our customers are loyal to us right up until the second somebody offers them a better service.” – Jeff Bezos, Amazon CEO

Summary:

  • Bezos Vision
  • Improving Financials
  • BCG Matrix describing AMZN’s current business market environment
  • Amazon Expansion
  • I Know First Algorithm is currently bullish on AMZN

Bezos Vision

Amazon is an exciting company that has used continuous innovation to improve its services while achieving tremendous scale. Company founder Bezos describes a passion and eclectic sensibility for innovation, telling interviewers, “I think neighborhoods, cities, and towns that have evolved are more interesting and delightful than ones that have been carefully top-down planned.” His business acumen is in realizing that “Our customers are loyal to us right up until the second somebody offers them a better service.” But rather than this reality dismaying him, he states, “And I love that. It’s super-motivating for us.” No one can doubt his motivation to satisfy customers and his ability to instill that culture among his staff. As his vice president, Stephenie Landry, explains, her business tries to satisfy only two customer requests: “Do you have what I want, and can you get it to me when I need it?” Whether it is by developing enormous warehouses aided by robotics and computers, providing subscription services that allow streaming of a variety of information and entertainment, or developing systems that allow immediate product delivery for a tremendous range of products, Amazon is at the forefront of customer service.

When Bezos left Wall Street, his vision was to create a massive company by first establishing his online bookstore. The name  “Amazon” gives you a sense of the enormity and confluence of the company he envisioned. His strategy was to invest in his brand and expand his customer base, while not fixating on profit. Bezos’s patience eventually paid off.  He continues to create new products and services, utilizes his deep pockets to invest in them, and by doing so gain market share. His recent acquisitions and product development includes the newspaper business, cloud computing, and even TV and movie production. Bezos is now worth 71billion dollars, earning him a spot in the top five Forbes billionaires club. meanwhile, Amazon is worth over 292 billion, earning it the title of 12th World’s Most Valuable Brand.

 

AMZN Stock Forecast

Improving Financials

Amazon, which started out as an online bookstore, is now the largest internet-based retailer in the world, selling electronics, apparel, furniture, toys, jewelry, and even food. Recently, Amazon’s fourth quarter results were published, and were higher than expected. The EPS (earnings per share) estimated to be $1.35 was actually $1.54, a 54% increase from 2015. Also, revenue, net income, and operating activities all sky rocketed over the past year. Below is a chart showing 2015 and 2016 fourth quarter results and percentage increase:

 

2016 Q4 2015 Q4 % Change
Revenue $43.7 billion $35.7 billion 22%
Net Income $749 million $482 million 55%
Operating Activities (CFS) $16.4 million $11.9 million 38%
Earnings Per Share (EPS) $1.54 $1.00 54%

(Source: Yahoo.com)

There are a few contributing factors to Amazon’s rise in profitability. The increase in revenue, net income, and operating activities can be explained by the expansion of Amazon prime members. According to Statista, there are 65 million prime members, an increase of 9 million from 2015. Amazon Prime is a paid subscription service offered by Amazon, giving users extra benefits, including shipping, videos, and streaming. Amazon Prime members are now able to choose from over 50 million items with free two day shipping, prime video is now available in over 200 countries, and Prime Now has been introduced to new cities. Other features, including Prime Reading and Twitch prime have been added, attracting new members.

BCG Matrix on Video Streaming Market

Key

Hulu: Green                  Top Left: Star                      Top Right: Question mark

Netflix: Red                   Bottom Left: Cash Cow     Bottom Right: Dogs

Amazon: Blue

Above is a BCG matrix of the top 3 companies in the video streaming industry; Netflix, Hulu, and Amazon Video. BCG matrix is a framework created by Boston Consulting Group to evaluate the strategic position of the business brand portfolio and its potential. It classifies business portfolio into four categories based on industry attractiveness (growth rate of that industry) and competitive position (relative market share). These two dimensions reveal likely profitability of the business portfolio in terms of cash needed to support that unit and cash generated by it. The general purpose of the analysis is to help understand, which brands the firm should invest in and which ones should be divested.

According to the BCG matrix, Netflix is a star, meaning the company maintains a high market share and market growth rate. One should invest money into stars because stars are expected to become cash cows, generating positive cash flows.

Hulu and Amazon are both question marks, meaning they need closer consideration. They hold low market share in a fast growing market. They both have potential to gain market share and become a star, which would later become cash cows.

Amazon Expansion

Amazon CFO Brian Olsavsky mentioned new investments, making 2017 a big investment year. These investments include new warehouses, a liquor store, and an Amazon Go store. Amazon’s liquor store will be giving free beer and wine-2 hour delivery and $7.99-1 hour deliver for Prime Now members. This will start in Cincinnati, Ohio and is expected to be incredibly successful.

 

The new Amazon Go Store will debut early this year in San Francisco. The store will allow customers to pick up items from an amazon store and walk out, paying for it through their own Amazon account. This will save time waiting in line and eliminate the need for cashiers. Andrew Melville, a strategist at continuum, says “Amazon Go marks a big step forward for the entire retail industry. This technology could transform business models and the customer experience, and the use of technology across retail.” Following the release of Amazon Go and Amazon Now, the company looks to see its growth into the future. In a previous I Know First article, Samantha Fischler details its release and how it’s making an impact in the market.

Image Source: Amazon

Latest I Know First Forecast for Amazon:

Previous Success I Know First Algorithm Forecast for AMZN

On June 10, 2016, I Know First maintains a bullish stance on AMZN with a signal strength of 66.79 and predictability of .28 for the one year forecast.

 

Above is the latest forecast I Know First algorithm released on March 6, 2017.  If we were to compare the forecast back on June 10, 2016, we can see both forecasts rate AMZN as a buy.  If the previous forecast accurately predicted the stock would increase and it did by almost 17%, the latest forecast below could indicate future increase in the stock’s value.

With Bezos vision and Amazon’s rate of innovation, Amazon will continue to grow and expand over time. Examining the BCG model, we are able to see how well Amazon is doing in the Video Streaming industry. Through the I Know First bullish forecast, we see that Amazon is predicted to increase in stock value. Therefore, Amazon is considered a great investment.

I Know First Algorithm Heatmap Explanation

The sign of the signal tells in which direction the asset price is expected to go (positive = to go up = Long, negative = to drop = Short position), the signal strength is related to the magnitude of the expected return and is used for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day and can be simplified explained as the correlation based quality measure of the signal. This is a unique indicator of the I Know First algorithm, allowing the user to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above 0 in order to fill confident about/trust the signal.

 

 

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