Why Buy Amazon Stock? Amazon is practically a byword for internet shopping these days, and the multinational technology giant has truly cornered the market when it comes to online retailing.
But there’s more to the company’s constantly evolving story outside of just e-commerce. Indeed, much of Amazon’s future growth resides in the potential of its other businesses.
Here we’ll take a wider look at Amazon’s vast product and services portfolio, and pinpoint which economic drivers will take the company forward in the future.
Amazon Is Not Just An Online Retailer
Despite making the majority of its revenues through its online stores and third-party retail seller services, Amazon also generates large amounts of cash from its less high-profile or well-known segments.
The company operates several subsidiary businesses, including its own physical brick-and-mortar stores such as Amazon Go and Amazon Fresh, a grocery delivery service through Amazon Prime Pantry, and a number of smaller boutique offerings such as Amazon Drive, Amazon Business and AmazonSmile.
Moreover, Amazon also has some medium-sized yet big-hitting ventures that have grown so successful over the last few years that they could over time come to rival its retail business. These are:
Amazon Web Services Is A Profit Machine
To get a measure for not just how important these operations could be for Amazon in the future, but just how crucial they currently already are, it’s worth noting that presently Amazon’s biggest source of operating profit comes from its cloud computing platform, AWS.
Indeed, AWS is expanding its global infrastructure footprint at a rapid rate, and accounts for a third of the total market in cloud-based technology as it is. The segment also generated $13.5 billion of operating profit from $45.4 billion of net sales in fiscal 2020, with that profit representing a 47.1% increase from the previous year.
Amazon Prime Generates $25 Billion In Revenue
Amazon Prime is Amazon’s subscription service vehicle, and, after the firm’s retail and AWS wings, is the next highest earning business, bringing in $25.2 billion of revenue in 2020.
Underpinning a critical component of Amazon’s success is the idea that the company has the ability to continually generate recurring revenue streams. This is where Amazon Prime is so important.
In his latest shareholder letter, Amazon’s CEO, Jeff Bezos, remarked that the company now has a total of 200 million paying subscribers, up 50 million from around a year before. This number is quite remarkable, and indicative of where Amazon’s main revenue growth will lie in the future.
Amazon Logistics Challenges FedEx & UPS
Amazon’s delivery operations were once little more than a second thought; yet now, its transportation network is growing, and it’s looking like it could be one of the company’s most exciting ventures.
Driven by two mutually fortifying flywheels i.e. Amazon’s vertically integrated asset infrastructure and its huge customer database, the company has finally realized the power it wields in the logistics marketplace.
Jeff Bezos’ now famous quote, “Your margin is my opportunity”, appears to have turned its gaze on the megaliths of the transportation industry, making the likes of Fedex (FDX) and UPS (UPS) sit up and take notice.
Amazon Financial Outlook
Amazon Revenue Growth Is Extraordinary
Amazon’s growth story has been one of historic proportions, and, compared with its traditional rivals in the online shopping space, the company leaves them trailing in its wake.
Take, for instance, one of Amazon’s main US competitors, eBay: not since 2006 has Amazon not posted a greater year-on-year revenue increase than its counterpart, with its latest annual growth figures double that of eBay’s at 38%!
And it’s something of a mystery how an enterprise of Amazon’s size continues to grow at such a rapid rate. Its net sales for the fourth quarter 2020 were up 44% at $125.6 billion, and its operating income was up a staggering 77% at $6.9 billion compared to the same quarter in 2019.
Net income was up an even greater 84% for the full year 2020, at $21.3 billion vs. $11.6 billion the year before.
Amazon Valuation: Is AMZN Undervalued?
So where does this leave us when it comes to finding the right value for Amazon stock?
First, it needs to be recognized that Amazon’s price action has been flat-lining for the last ~9 months. The company hasn’t benefited from the tech-stock boom of early 2021, but it hasn’t suffered much depreciation either.
Wall Street has an optimistic outlook for Amazon over the next year, with a consensus estimate of its price reaching somewhere north of $4,100.
Second, Amazon’s financial multiples are fairly priced, especially when you consider its past performance of continued growth. Its forward price-to-sales of just 3.62 suggests Amazon is pretty undervalued; and if you compare its EPS of $14.09 with eBay’s $0.86 the value proposition is made even more stark.
To throw a little caution out there, Amazon’s current share price isn’t cheap – even though it’s trading under its September 2020 high of $3,552. However, its fundamental business activities are in rude health, and continued revenue growth is still predicted.
First quarter 2021 guidance from management estimates net sales will grow somewhere between 33% on the low-end to 40% on the high-end.
Operating income is expected to be in the range of $3.0 billion to $6.5 billion, which factors in roughly $2.0 billion of costs due to COVID-19.
First quarter 2020 operating income was $4.0 billion, so given the disruption from the coronavirus crisis this doesn’t appear too negative of an outlook.
Taking each of these considerations into account, an double digit upside from the present price seems about right.
And Finally…Who Will Take Over From Bezos?
Does Amazon have it in itself to continue its unstoppable rise?
Looking at all the signs, the answer is yes. Jeff Bezos is stepping aside as CEO and handing over the reins to Andy Jassy, who’s previous role at the company was spearheading the hugely successful AMS segment of the business. If he can bring the same kind of magic that he brought to the cloud marketplace to Amazon as a whole, the company will be in good stead.
Add to the fact that Amazon has just announced its intention to expand its Amazon Care program – a tele health platform it’s been trialing with its own employees and is now looking to roll-out nationally – and the future looks bright.
If the company can make inroads into the healthcare sector in the same way it has done with other industries, the pay-off could be huge. And past successes suggest it can.
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.