Today, we are highlighting Amazon (NASDAQ:AMZN) and Tesla (NASDAQ:TSLA). For years an out performer, we see Amazon as significantly undervalued. Here is why we are bullish:
- Amazon’s P/S ratio (price per sales) is relatively low given Amazon’s revenue growth. And beyond recent revenue growth, Amazon’s valuation multiples don’t fairly encompass future growth prospects across its e-commerce and web services businesses (Amazon AWS). Amazon experienced 22% year over year sales growth in the first quarter of 2017, which we feel renders its 3.2x revenue multiple as cheap.
- Amazon Web Services, the company’s cloud computing division, represents an undervalued asset within Amazon. In the first 2017, AWS represented ~10% of aggregate revenue for Amazon, but contributed ~88% of operating profits. AWS did $3.7B in sales in the first quarter of 2017, up 43% from the prior year, and reaching an annual run rate of around $15 billion. For comparison, Equinix (NASDAQ: EQIX) is the largest pure play publicly traded cloud computing company, and its first quarter 2017 revenue was only $949MM, with a much lower 12% year over year growth rate. In a market where other comparable cloud computing companies like EQIX trade at 8-10x revenue, AWS would be worth around $130B as a stand-alone entity. Amazon continues to grow this business and has recently added ~300 new services and features to AWS. This should continue to drive adoption and revenue growth to a business that already has lots of momentum.
- Amazon’s international segment currently operates with negative margins. However, Amazon has strategically operated many of its businesses at a loss to offer better prices than competitors, win new customers, and ultimately drive penetration and take market share. This has been effective and Amazon has grown revenues in this division by 16% year over year. We expect Amazon to replicate its North American success elsewhere and operate profitable businesses when it strategically makes sense. Its international business represented ~30% of aggregate revenue in 2016 and we expect this number to grow, coupled with increasing margins over the long term.
Despite recently trading at all-time highs, we see significant upside and growth potential for Tesla. Here is why we are bullish:
- Tesla has had impressive growth recently; it delivered 25,000 vehicles globally during the first quarter, a 69% year over year increase from the first quarter of 2016. And, with a 2018 target of delivering 500,000 cars, Tesla is on track for sales of $25B. It is important to note that Tesla’s already impressive 26% gross margin per car will increase as it delivers more cars, and analysts have speculated that this margin could reach 30%. For reference, most car companies, like GM and Ford, have gross margins per car that hover around 10%.
- Despite impressive manufacturing build out, the company has kept a relatively low debt level. International market leaders Daimler (DIA) and General Motors (GM) both have total debt to total capital ratios of ~66%. Tesla’s comparable ratio is 57%. This indicates that Tesla is below market leaders in its use of debt to finance its operations and that the company room the use debt to finance future manufacturing build outs.
- We see Tesla as more than a traditional car company, we see it as an innovative tech and design company; like Apple, Tesla produces industry leading cache’ products with justifiable premium pricing and a differentiated delivery model. We see Tesla as a diversified business that will continue to capture the shift in consumer preferences toward electric cars, while being a leader in the nascent self-driving car space, and building a significant battery business.