The Most Obvious Buy in the Market Right Now
Summary
Daniel presents a comprehensive bullish thesis for Amazon, arguing it is currently one of the market's most attractive and undervalued long-term investments, capable of delivering approximately 20% annual returns over the next five years with minimal risk. Daniel points out that despite the S&P 500's overall gains being driven by the AI complex (semiconductors, hardware), hyperscalers, including Amazon, have been overlooked, leading to an attractive valuation. Daniel highlights that the forward PE premium of the Magnificent 7, relative to the rest of the S&P 500, is at an 11-year low, making these high-quality stocks an "obvious buy."
Daniel addresses and refutes several common bearish arguments against Amazon. Daniel challenges the notion of low past 5-year returns by explaining that Amazon was significantly overvalued in 2021; since January 2023, when its valuation improved, the stock has returned about 180%. Daniel emphasizes that Amazon's underlying fundamentals have grown substantially faster than its share price, compressing its multiple and indicating strong future returns. Daniel also tackles the argument that Amazon's AI capital expenditure will not pay off, providing multiple counter-examples. Daniel notes that Amazon's AI assistant, Rufus, nearly doubles customer conversion rates and increases engagement, directly boosting revenues. Furthermore, Daniel states that Amazon's advertising business, projected to grow 21% to $83 billion in 2026 with 46% operating margins, is significantly enhanced by AI. Daniel points to Amazon's projected tripling of data center capacity to over 30 gigawatts by 2030, which will significantly accelerate AWS growth. Daniel highlights that Amazon recently raised GPU prices by 20% due to overwhelming demand, underscoring the immediate revenue-generating power of its capex. Daniel reveals that Amazon's internal chips business (Graviton, Trainium, Nitro) is generating over $20 billion in annual revenue, growing at triple-digit rates; if sold externally, it would be a $50 billion business, surpassing AMD's entire revenue, yet remains undervalued by the market.
Regarding the argument that Amazon is expensive on a price-to-earnings basis, Daniel dismisses the P/E ratio as an inappropriate valuation metric for Amazon due to its historical volatility and Amazon's strategy of reinvesting profits for future growth. Instead, Daniel recommends using the Price to Operating Cash Flow multiple, which has been much more stable. Daniel states that Amazon currently trades at approximately 17.3 times operating cash flow, which is well below its historical averages and indicates the stock is "pretty dang cheap."
Daniel also underscores several key growth drivers:
Daniel's conservative discounted cash flow (DCF) model, assuming 20% annual operating cash flow growth (below analyst expectations) and a 20x operating cash flow multiple (below the historical average of 25x), still projects a 23.2% compounded annual growth rate for Amazon's share price over the next three years, with a fair value of $342 and a future stock price of $455. Daniel concludes by reiterating that Amazon is fundamentally undervalued with a low-risk, high-reward profile, prompting Daniel to actively increase his position.
Mentioned Stocks
Reasoning: Daniel states that Amazon is one of the best long-term stocks, projecting 20% annual returns with very little risk over the next 5 years. Daniel highlights that Amazon is currently attractively priced due to capital rotation out of hyperscalers, leading to an 11-year low in the Magnificent 7's forward PE premium. Daniel refutes bear arguments that Amazon's stock returns have been low by noting the stock was overvalued in 2021 but has returned ~180% since its valuation improved in January 2023, with fundamentals growing faster than the share price. Daniel dismisses the P/E ratio as a valuation metric, preferring Price to Operating Cash Flow, which currently stands at ~17.3x, "pretty dang cheap and well below its historical averages." Daniel emphasizes that AI capex is paying off, citing Rufus's impact on conversions, 21% growth in the ads business (46% operating margin), tripling AWS data center capacity by 2030, a 20% increase in GPU prices due to high demand, and Amazon's internal chips business generating over $20 billion annually (potentially $50 billion if sold externally, surpassing AMD). Daniel is also bullish on Project Kuiper (LEO service), projected to generate $20 billion in revenue by 2030, with Starlink proving the market's profitability. Daniel points to accelerating growth in key high-margin segments (third-party seller services, advertising, subscriptions, AWS) and expanding gross (50.6%) and operating cash flow (20%) margins. Daniel's conservative DCF model projects a 23.2% CAGR for the share price over the next 3 years, with a fair value of $342 and a future stock price of $455. Daniel explicitly mentions actively buying the stock over the past few months, continuing to add to his position, and that Amazon is now the second-largest position in his portfolio at around 10%.