The Bull Case For Amazon Stock

For the last several years, Amazon (AMZN) has been the world’s second-largest retail company. Walmart (WMT) continues to dominate the retail industry with more than three times Amazon’s sales. When it comes to e-commerce platforms, though, no one comes close to matching Amazon’s reach. It has become a ubiquitous brand used by millions of customers.

Investors have taken a bull position on Amazon stock during the pandemic. With people staying home and stores closing early, Amazon has become the go-to source for necessities delivered directly to the buyer’s door. Share prices have grown in value to match the critical consumer need filled by Amazon.

During mid-March of 2020, when most states realized they needed to shut down parts of the economy to fight the pandemic, Amazon stock fell from about $2,140 to $1,785. Practically all stocks tumbled during this time. A year later, though, the price easily broke $3,000 and crested at $3,729 on July 9. It’s been a banner year for Amazon (AMZN).

The high stock price raises an important question, though. Can Amazon continue to grow, or has it hit a temporary ceiling? This is the bull case for Amazon stock.

Third-Party Sales Keep Growing on Amazon

Third-party sellers represent a growing trend on Amazon’s e-commerce store. During Q2 2021, third-party units accounted for 56% of Amazon’s total paid units. In the same quarter a year ago, third-party units represented 53% of sales. It’s a subtle shift, but it carries a significant meaning.

As more small to medium businesses turn to Amazon as an e-commerce solution, Amazon earns money by doing very little. These businesses could choose to create their own web-based stores, but they find it easier and more profitable to use Amazon. In return, Amazon takes a small cut of the revenue.

This matters because Amazon already develops tools to market its own products. Third-party sellers might force the store to scale up, but it can do so inexpensively because it owns AWS servers. The $113 billion in net third-party sales only generate profit for Amazon. It’s practically a form of passive income that enriches Amazon without adding significantly to work and expenses.

Assuming that Amazon can continue this trend, the success of smaller companies will make it an even larger destination for consumers.

Prime Membership Growth Has Accelerated

Amazon (AMZN) reports that Prime memberships have grown quickly over the last 18 months. The company points to free delivery and access to free or discounted entertainment to explain why more people joined Prime. 

The bull position on this trend notes that Prime members tend to spend more with Amazon than non-members. Now that Amazon has attracted more people to Prime, it makes sense to assume that revenues will increase.

There is a small setback to this position, though. Amazon believes that Prime membership growth will slow now that many states have decided to loosen pandemic restrictions. Don’t expect the acceleration to continue.

At the same time, don’t expect Amazon to lose very many of the Prime members it gained during the height of the pandemic. Most consumers keep their memberships without thinking about whether they should cancel. Indeed, Amazon Prime membership renews automatically, which makes it even easier for today’s members to remain.

Instead of focusing on the expectation of slower growth, concentrate on the increased revenues that will come from the spike in pandemic Prime memberships.

Advertising Improvements Help Shoppers Connect With Products

Amazon advertising has improved significantly over the last couple of years. The company reports that it plans to launch 40 new features soon that will make it even easier for consumers and sellers to connect.

Improvements in Amazon advertising mean two positive things for Amazon share prices. First, it means that more consumers will quickly find the products they want, which should mean they spend more money. Impulse buys almost always increase when people get quick results.

Second, it means that third-party sellers will invest more in advertising their products on Amazon. That’s two growing sources of revenue that Amazon can look forward to nurturing for years to come. Why wouldn’t investors take a bullish position on that?

The Q2 Dip in Sales Is a Short-Term Adjustment to Looser Pandemic Restrictions

Naysayers will point to the dip in Q2 revenues as a sign that Amazon cannot sustain its growth. They have one thing right: as more stores opened, people rushed to in-store shopping as a form of entertainment. They had spent months in their homes. Then, they wanted to get out into the world and spend money at brick-and-mortar stores.

What does this really mean for the long-term, though? The additional Prime members cultivated during the pandemic will continue buying from Amazon. Also, the novelty of in-person shopping will wear off quickly.

It makes sense to buy some items, such as clothing, in person. Shoppers don’t need to test most consumer goods to see how well they work, though. With video reviews, customer comments, and free shipping, it just makes sense for people to keep buying most things from Amazon.

The worst thing that could happen is that revenues slip to pre-pandemic numbers. That’s unlikely to happen. Even if it does, it still leaves Amazon as a dominating force.

Innovative Cloud Services Are Making AWS Essential for Enterprises

It’s easy to forget that Amazon owns most of the world’s cloud servers. Still, it’s a wildly profitable segment of the company. Right now, Amazon has a once-in-a-lifetime opportunity to accelerate the growth of its cloud services as more companies decide to embrace remote work and hybrid working schedules.

More companies, including smaller ones, have also seen the value of analyzing data. AWS services make data storage, analytics, and predictions relatively easy. Expect to see Amazon invest more in its subscription as a service plans. They provide the flexibility businesses want and an ongoing stream of income that will make Amazon increasingly profitable.

How High Can Amazon Stock Go?

Based on a discounted cash flow forecast analysis, Amazon could rise as high as $4161 per share.

Unfortunately for investors, the value doesn’t depend exclusively on Amazon’s decisions. How the world reacts to Covid-19 variants will also influence share prices. While the world wants to go back to normal, it only makes sense to embrace reality and earn money from how the economy shifts to meet consumer needs.

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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.