Amazon Investment Thesis

Very few companies can say that they have surpassed the $1 trillion mark, but Amazon is solidly on that list. With a current valuation of more than $1.5 trillion, some suggest it could hit $2 trillion over the next year.

However, some detractors insist the recent rise was driven by COVID-19 alone, and share prices are likely to come crashing down when the pandemic is finally extinguished. 

Understanding Amazon’s advantages, as well as the risks it faces both short-term and long-term, is the first step in determining whether Amazon stock is right for your portfolio.

Collectively, this information creates your Amazon investment thesis – how the company’s shares support or challenge your strategy and whether investing in Amazon fits in with your larger approach to building wealth. 

Amazon Market Share Dwarfs Competitors

E-commerce was already on the rise before COVID-19. In 2018, 14.3 percent of retail purchases were made online, and that increased to 15.8 percent in 2019.

The unique challenges of 2020 changed everything. As people limited trips to brick-and-mortar stores, online shopping took off.

E-commerce jumped to 21.3 percent of total retail sales, and total spending went up by 44 percent to $861.12 billion – nearly three times the 15.1 percent growth from 2018 to 2019. 

While those growth trends may lose some momentum in 2021, the fact is that online shopping is here to stay. That’s great news for Amazon, which has long been the market leader in online sales.

Amazon amassed an estimated 38 percent of the online retail market in 2020, which is all the more impressive when you consider that its closest competitor – Walmart (WMT) – has just 5.8 percent of the online retail market. 

Amazon’s e-commerce business isn’t the company’s only claim to fame. Amazon Web Services (AWS), the company’s cloud computing platform, is also leading the market by a wide margin.

In 2020, total global revenue for cloud infrastructure service revenues came in at $129 billion, and AWS commands 32 percent of that market.

The second and third place cloud computing providers, Microsoft (MSFT) and Google (GOOG), don’t have anywhere near that market penetration. In fact, when the two are combined, they still can’t match AWS.  

In short, from a market share perspective, Amazon is a smart bet for investors. However, those figures don’t tell the whole story.

Is there room for Amazon to grow its market share? More importantly, is the market itself growing? If the answer is no, then Amazon may not generate much of an increase in value for shareholders.

Is Amazon Growing Revenues? 

Amazon was a pioneer in e-commerce, and it has taken a leadership position in other areas of innovation and industry disruption. The company and its leaders have a special gift for creating the products and services of the future long before any of their competitors. 

The decision to launch Amazon Web Services (AWS) turned out to be downright prescient. AWS rolled out in 2006, long before the larger shift to cloud computing.

At the time, industry experts and market analysts thought the project would flop. As it turned out, AWS was ahead of its time. That gave Amazon an edge when cloud computing caught on with mainstream users. 

Entering the e-commerce and cloud computing space gave Amazon an opportunity to capture market share before competitors could catch up.

Along the way, the company has grown revenues sharply, increasing its business nearly every quarter. Year-over-year, the number goes up consistently – often by a large percentage. This is a look at the past 10 years: 

• 2020 – $386 billion
• 2019 – $281 billion
• 2018 – $233 billion
• 2017 – $178 billion
• 2016 – $136 billion
• 2015 – $107 billion
• 2014 – $89 billion
• 2013 – $74 billion
• 2012 – $61 billion
• 2011 – $48 billion

It’s true that 2020 was something of an anomaly, and revenues may not increase at the same rate in 2021. However, Amazon has successfully grown revenues for many consecutive years, regardless of economic conditions. That bodes well for future performance, which is a positive sign for investors.

That leads to the logical next question: what are Amazon’s earnings? It doesn’t matter how high revenues are if the company can’t turn a profit. 

What Rate Are Amazon Earnings Growing?

The fascinating thing about e-commerce and cloud computing is that they have far less overhead than peers in other industries.

Operating an e-commerce business incurs more expenses than a cloud computing platform, but those costs are lower than brick-and-mortar retailers. That fact, combined with careful management, has generated strong profits for the company and its shareholders during most years. 

Amazon’s annual earnings per share (EPS) grew in leaps and bound for the past three years in particular: 

• 2020 – 81.79 percent increase over 2019
• 2019 – 14.25 percent increase over 2018
• 2018 – 227.48 percent  increase over 2017

That’s an earnings rate increase that most organizations cannot match. EPS figures for the past 10 years break down as follows: 

• 2020 – $41.83 per share
• 2019 – $23.01 per share
• 2018 – $20.14 per share
• 2017 – $6.15 per share
• 2016 – $4.90 per share
• 2015 – $1.25 per share
• 2014 – ($0.52) per share
• 2013 – $0.59 per share
• 2012 – ($0.09) per share
• 2011 – $1.37 per share

The rate at which Amazon earnings are growing makes these shares appealing to investors interested in a buy-and-hold strategy. 

Does Amazon Stock Have A Moat?

In financial circles, Amazon is considered to have one of the widest moats in the market. The company has developed competitive advantages that are nearly impossible for e-commerce and cloud computing industry peers to duplicate. 

First, and most obvious, is the company’s reach. It has developed an unmatched menu of goods and services through supplier and merchant partnerships, and its prices remain competitive based on the sheer volume of sales. 

Second, Amazon is reducing reliance on outside vendors for delivering products to its e-commerce customers. The company bought its own Boeing 767 jets for conversion to cargo planes, and its fleet is expected to top 85 aircraft by the end of next year. 

Further, Amazon is working on drone delivery to get packages from distribution centers to customers’ homes, and it has developed a variety of other “last mile” mile fulfillment solutions to shorten the time between receiving an online order and putting it in customers’ hands. 

The “click-to-door” time is critical to e-commerce retailers. The industry averages more than five days to fulfill orders, but Amazon has that down to roughly 2.2 days. That alone creates a wide moat for Amazon. 

Amazon Management Quality

Jeff Bezos, the famous – and sometimes infamous – founder and CEO of Amazon, recently announced he is stepping down. He will move into the role of Executive Chair, and Andy Jassy will replace Bezos as CEO. 

From an investor perspective, this change is provoking some angst, as Bezos was responsible for the innovation that drove an idea into a trillion-dollar organization in less than three decades.

In Bezos’ own words: 

Amazon is what it is because of invention. We do crazy things together and then make them normal… If you do it right, a few years after a surprising invention, the new thing has become normal. People yawn. That yawn is the greatest compliment an inventor can receive.

Some believe Bezos’ genius and drive are irreplaceable, and Jassy can’t possibly take the business to the next level. However, that opinion is a minority view, and most industry experts are encouraged by this transition. Bezos believes that now is exactly the right time for a change.

As he said to shareholders: 

When you look at our financial results, what you’re actually seeing are the long-run cumulative results of invention. Right now I see Amazon at its most inventive ever, making it an optimal time for this transition.

It is clear that Bezos is confident that the company will continue to drive innovation and that Jassy is the right person at the right time to take his place. Those that remain concerned can reassure themselves with the fact that Bezos will be close by to provide advice and support to his successor.

Risks to Amazon Stock

There are two risks that might put a damper on investor interest in buying into Amazon at this time.

First, by many measures, the company is overvalued. It currently trades at a price-to-earnings ratio approaching 75, and the company is unlikely to see the same sort of growth in revenue that set 2020 apart as a blockbuster year.

Some investors may wish to wait for a drop in share price before adding this stock to their portfolios. 

Second, Amazon is under heavy scrutiny by regulators in the United States and the European Union. Government agencies are taking a hard look at Amazon and others, based on concerns that the companies violate antitrust laws.

Some lawmakers are calling for heavier regulation of the tech industry, which would be a best-case scenario. The worst-case scenario is that the companies will be required to break up their businesses, reducing their ability to hold a monopolistic grip on their respective industries. 

Regulatory intervention is certain to cause disruption to Amazon’s business, though it isn’t clear how that would affect shareholders at this time. For some, the possibility of a government crackdown is enough to postpone a share purchase until the investigations and reviews are resolved.

Amazon Investment Thesis Conclusion

The bottom line is that Amazon is in a strong position to deliver growth and profits over the long-term. Those who intend to buy and hold shares are likely to realize returns.

In the short-term, there is enough uncertainty that Amazon stock might not be the right choice. Declining revenues, overvaluation, and regulatory issues may cause temporary pain over the next 12 months. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.