As far as mega-cap technology companies go, Amazon (AMZN) remains one of the steadiest long-term growth plays in the market today.
Indeed, Amazon’s near-, medium- and long-term returns for investors are hard to beat, particularly given Amazon’s size. The fact that a company with a $1.6 trillion market cap is able to produce this kind of capital appreciation for investors consistently is hard to fathom. (See Amazon stock analysis on TipRanks)
For companies like Amazon, maintaining the company’s rather high valuation multiple is key to long-term capital appreciation for investors. Growth remains robust for Amazon, though it has been slowing in recent years. The company’s 5-year, 3-year, and forward CAGR for revenue growth has declined from 29.88% to 29.45% to 27.2% on a forward-looking basis.
Indeed, this growth deceleration is slight, and reflects Amazon’s behemoth size. Still, revenue growth is declining. Thus, valuation multiples matter more for Amazon than for other stocks in the market today.
Accordingly, key inputs such as the risk-free rate and weighted average cost of capital matter more today for Amazon investors than in the past. In this regard, the near-term outlook has once again shifted to be optimistic. Inflation concerns appear to be simmering down. The Federal Reserve has urged investors to consider the idea that the inflation we’ve seen of late is simply transitory. Accordingly, bond yields have reverted to lower levels, juicing the valuations of growth stocks in recent months.
With this backdrop, let’s take a look at one key recent catalyst everyone’s talking about.
Amazon Deal to Acquire MGM Studios a Big Deal for Investors
On May 26, Amazon announced it signed an agreement to purchase MGM studios for $8.45 billion.
This deal certainly juices the company’s growth prospects in its media & entertainment division. The ability of the company’s Amazon Prime Video segment to gobble up market share in the streaming war it’s waging with the likes of Netflix (NFLX) and Disney (DIS) centers on the premise that Amazon can entice viewers with new and exciting content.
This deal provides Amazon with a vast library of more than 4,000 film titles. Among the key franchises acquired as a result of the deal include James Bond, Rocky, and Handmaid’s Tale, among others.
From a content perspective, this deal provides an immediate jolt to Amazon’s goals of becoming the industry-leading streaming platform. It’s going to be an expensive race to win, but Amazon has proven it’s got the deep pockets and willingness to spend to become the favorite in this space.
The size of this deal is also remarkable. This is the second-largest deal in Amazon’s history, following its $13.7 billion 2017 acquisition of Whole Foods.
For investors bullish on Amazon’s commitment to growing its streaming revenues, this deal is meaningful. The extent to which the ROI on this deal will pan out favorably to investors over the long term depends on one’s time horizon. Indeed, this deal looks more like a strategic move rather than one with great short-term return potential.
That said, over the long term, Amazon plans to reimagine and redevelop the "treasure trove of IP in the deep catalog" the company acquired to provide continued value over the long-term for investors.
Other key deals Amazon has made of late in its bid to strengthen its streaming moat include a $1.2 billion per year deal with the NFL for streaming rights for 15 NFL games each season, for the next 11 seasons.
What Analysts Are Saying About AMZN Stock
According to TipRanks’ analyst rating consensus, AMZN stock comes in as a Strong Buy. Out of 31 analyst ratings, there are 31 Buy recommendations.
As for price targets, the average analyst Amazon price target is $4,295.17. Analyst price targets range from a low of $3,720.00 per share to a high of $5,500.00 per share.
Bottom Line
This massive deal for MGM signals to investors that Amazon is in the streaming business for the long haul. Indeed, building a durable competitive advantage in this space is going to prove difficult and costly.
Nevertheless, long-term investors who have bet on Amazon’s success in growing its other core businesses, such as Amazon Web Services, into the giants they now are, know that growth won’t always be linear. Nevertheless, it could still be very lucrative over the long-term.
Amazon may well have overpaid for this deal. However, considering the cost of creating a comparable suite of original content from scratch, perhaps Amazon got a steal with the MGM deal.
Time will ultimately tell how this deal turns out. For now, investors should take solace in Amazon’s firm commitment to its streaming endeavors. This is a growth company that hasn’t disappointed investors for decades, so there is reason to believe it won’t start to do so now.
Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.