- Amazon is benefiting from the accelerating shift to online shopping in the pandemic. First, traditional retailers have limited capacity at their stores to reduce crowding, more and more people are turning to shop online. Simultaneously, Amazon continues to expand its fulfillment capacity, which allows it to deliver packages faster. It, in turn, sells more and can better control costs.
- Any business or organization that is not already running its workloads on the cloud plans to do so as cloud computing is the future. As the top cloud vendor, Amazon is best-placed to take advantage of massive growth opportunities in the cloud market. Cloud is also Amazon’s most profitable business, so gains have a huge impact on its overall earnings.
- Amazon’s advertising business doesn’t get noticed much. Still, it is roaring, and the company should benefit from companies ramping up their marketing spending to try to win back the sales lost during the pandemic.
Amazon: The company and the business
Amazon.com, Inc. (AMZN) is a technology company with a diversified operation. In addition to e-commerce, for which it is best-known, Amazon also provides cloud computing services and makes hardware products.
Amazon was started in 1994 by Jeff Bezos, initially focusing on selling books online. Since its start as an online bookstore, the company has made several acquisitions to expand, enhance, and diversify its business. Its most notable acquisitions are Whole Foods, Audible, and Twitch.
The Whole Foods deal provided a boost to Amazon’s retail business as it extended into organic foods retailing space and also got stores to use as pickup locations for its online shoppers. At $13.7 billion, it still stands as Amazon’s biggest purchase in history. The audible acquisition enhanced its bookstore business, and Twitch gave it a footprint in the gaming market.
Amazon went public in 1997. It priced its stock at $18 apiece for the IPO and raised $54 million. The company used the IPO proceeds to make acquisitions that allowed it to grow and diversify quickly.
Those who purchased Amazon stock immediately after it went public are now looking at more than 16,000% return on their investment.
Why invest in Amazon stock?
Pandemic is accelerating the shift to online shopping. In the US, for example, online retail sales rose 44 percent in 2020. That was almost three times faster than the growth recorded in 2019 and registered as the fastest growth in at least two decades. But online sales still represent just over 21% of the US total retail market, meaning Amazon still has a massive growth opportunity ahead.
But it is not just in the US; the transition to online shopping is happening worldwide. The global online retail sales will hit $8.6 trillion in 2027 from $4.3 billion in 2019. In e-commerce, Amazon not only sells stuff but also provides merchant loans and advertising. It means the expanding e-commerce market should also increase demand for Amazon’s merchant loans and product advertising service.
Demand for cloud computing services continues to grow as businesses try to build more efficient and resilient operations after the pandemic. Global spending on cloud is on track to top $832 billion in 2025 from $371 billion in 2020. Amazon controls about one-third of the global cloud market, placing it in a great position to capitalize on the growth. Cloud is a particularly lucrative business for Amazon. The business contributed 60% of the company’s operating profit in 2020. It means gains in the cloud market translate well for Amazon’s bottom line.
Amazon is expanding quickly in markets like India which should be big for e-Commerce and cloud in the coming years. Moreover, the company is expanding its e-commerce and cloud capacity globally to expand the market opportunity.
Amazon fundamentals: Strong sales and robust balance sheet
Amazon’s revenue rose 42% to $125.6 billion in the fourth quarter. The revenue growth accelerated from 36% in the third quarter and 21% a year earlier. The company delivered a $7.2 billion profit for the quarter, which more than doubled from $3.3 billion a year earlier. The strong results stemmed from Amazon benefiting from the pandemic accelerating the shift to online shopping.
The pandemic also helped push more people to Amazon’s lucrative Prime program. Prime members not only spend more on Amazon purchases than regular shoppers, but they also pay an annual subscription fee of $119. Amazon’s subscription sales rose 35% to $7.1 billion in the fourth quarter. It means Amazon wins double with the Prime program as more people join it.
The company expects its revenue to grow between 33% and 40% in the first quarter of 2021. It sees operating profit coming in the range of $3 billion – $6.5 billion, compared to $4 billion in the same period last year.
Amazon has made huge investments in its delivery infrastructure. As a result, it cannot only ship packages to customers faster but also controls fulfillment costs. That, in turn, makes its business more profitable.
In addition to the e-commerce and cloud computing trends that are moving in their favor, Amazon also stands to benefit from the rise in online gaming and digital advertising. Amazon’s Twitch platform offers a live videogame streaming service and sells subscriptions and ads. Moreover, Amazon serves ads on its retail marketplace for merchants and brands.
Indeed, Amazon has become a major disruptive force in the digital advertising industry currently controlled by Google and Facebook. According to eMarkter, Amazon’s US ad sales shot up to $14.6 billion in 2020 from $10.2 billion in 2019. The ad sales are on track to reach $25 billion in 2022.
Amazon finished 2020 with $42.3 billion in cash against long-term debt of $31.8 billion. The strong balance sheet puts the company in a great position to continue investing in future growth.
A look at Amazon stock’s technicals
Amazon stock sports an RSI of 51. It trades 1.8% above its SMA 50 and 8% above its SMA 200.
Amazon is among investors’ favorite tech stocks. It has gained more than 50% in the past 12 months. Valuations are generally stretched across the stock market, with the S&P 500 at 45 times forward earnings. While Amazon is trading on the higher side at 49 times forward earnings, the valuation is more favorable than Shopify at nearly 400 times forward earnings.
Amazon stock has many secular tailwinds to keep it rising for the long-term.