The overall market managed to come back with a bang from the lows of March 2020. The stock market has recently hit record-breaking highs, while some stocks have shown a bit more volatility in the last six months. Skyscraping valuations are leading several investors to rein in their enthusiasm. Mixed economic signals and risk of contagion from the Evergrande fallout have investors wondering – is another full-on crash on the way?
If history is any indicator, a crash is almost a certainty. It’s a matter of when that’s debatable. Regardless, it is important to ensure you’re ready when it does.
There are many ways you can prepare your portfolio for a market fall, like having cash on hand to buy shares of companies that have a proven track record even in the most challenging of circumstances.
One of these types of companies – and the one stock to buy if the market crashes – is Amazon (AMZN).
Amazon – The Shopping Giant
Amazon (AMZN) is both innovative and a trend-setter. Now, that doesn’t mean that all the company’s ideas are brilliant – remember Fire Phone?
Still, the Seattle-based company has grown from its humble beginnings as an online bookstore to the Goliath of online shopping.
Amazon’s position as a digital service provider and its ability to adapt to ever-changing technology have solidified it as a guaranteed revenue-winner.
Such products as Amazon’s Alexa, Prime membership, and Amazon Web Services continue raking in the cash; the latter two products are subscriptions.
While the rest of the world was in lockdown mode, Amazon kept tight hold of the keys to the kingdom.
Q2 earnings skyrocketed into the stratosphere, shattering expectations.
Revenue soared 40% higher, to $89 billion, with EPS was reported at over $10 per share, nearly doubling Q2 of 2020.
The 2020 crash didn’t cause Amazon’s knees to buckle – in fact, the company danced its way through 2021. Even though many Big Tech companies have faced antitrust proceedings, Amazon has three big factors up its sleeve which help it to hold its own – whether pandemic or market crash:
Its revenue stream is diverse, providing a sturdy foundation for weathering an economic storm.
Customer loyalty is high, and retention rates for services such as Prime show rates of 93% for those with the company for a year – 98% of those who’ve had Prime for two years or more stick around.
Other growth levers include: AWS, healthcare, and ads – to name a few.
What Market Crash?
When companies grow and stabilize, sales growth typically starts to even out. Either the market is saturated or competition gets stiffer. The big companies that remain stable normally become value stocks because market share plateaus to produce steady revenue streams.
Excess cash is then usually shared as dividends with stockholders, which keeps shares desirable for those of a certain investment class.
In spite of its enormous size, Amazon fits in no such box.
Amazon doesn’t just have market share, it holds a monopoly. Amazon reported some the best quarters of growth in several years recently, such as 44% YOY growth in Q1 and Q2 2021. Even as other online shopping companies benefited from more people being at home, Amazon rivaled or outpaced them.
For instance, Amazon’s Prime Day in June broke records. Third-party sales were a leading contributor. The June 2021 event was the company’s best two-day sales period in history for its third-party sellers.
Third-party sellers were 56% of total sales in Q2, up from Q2 2020’s 53%. Q2’s net sales were $113 billion, amounting to a 27% YOY increase. This Q2 sales run included Prime Day and added to the YOY growth. Company executives note that Q2 was also the quarter many of Amazon’s customers began transitioning back to some semblance of normalcy compared to Q2 2020.
Consumers highly prize Amazon’s core product offerings – it’s how the company scored such high sales numbers In recent years. A market crash can’t touch that. Especially since, as ex-CEO Jeff Bezos noted in his last letter to shareholders, Prime subscriptions now top 200 million.
But ecommerce isn’t all this giant is up to. And with growth comes growing pains.
New Warehouses and New Employees – and Not Enough Room
In 2020, the company barely kept up with customer demands. Online sales were surging amid the virus. That’s what caused Bezos to postpone Prime Day from June to October. But the switch to the fall also opened up additional sales due to its proximity to year-end holidays. Having holiday sales spread out over an entire quarter allowed Amazon to work with – and not against – constraints.
In the two months before Christmas 2020, sales grew by 48% (estimated by Mastercard). The payments company anticipates an additional 7.5% for Christmas 2021.
But this year, Amazon is ready.
The company grew its fulfillment center footprint by half in 2020. Since March of 2020, it’s hired over 450,000 new workers, and before the holiday season this year, it expects to bring on an additional 125,000.
Amazon will have no trouble handling the influx of orders for this season. And the company is considering extending the shopping season even longer than last year. One of Amazon’s brick-and-mortar rivals, Target (TGT), isn’t launching its holiday run until a week after Amazon’s, and Target’s holiday shopping deals will last just three days.
Amazon plans to run new shopping deals every day of the holiday shopping season – and ingenious way to encourage shoppers to check back often.
It’s this aggressive spirit that could help Amazon continue to grab more and more of the market share – not just for holiday shopping, but for online retail in general. Even though there aren’t many who would argue that Amazon isn’t king already.
Amazon is the One Stock to Buy If the Market Crashes
Amazon has a history of rewarding its long-term investors. There’s no reason to think the company can’t continue doing so.
Even though its shares carry a $3,200 price tag, and a price-to-earnings (P/E) ratio of 61 times its trailing its earnings over the last 12 months, these shares trade at the lowest valuation in over five years.
Arguably, Amazon’s not a growth stock, a value stock, or peace of mind – it’s all three. According to a discounted cash flow forecast analysis, Amazon shares have upside potential to $4,178 per share.
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.