Amazon has grown into a $600 billion company.
The technology sector is off to a bumpy start in 2018, including e-commerce giant Amazon.com, Inc. (Nasdaq: AMZN). Quarter after quarter, Amazon continues to put up impressive growth numbers. Despite concerns over the stock’s valuation, Amazon’s aggressive expansion, unique market positioning and ability to disrupt new industries have consistently propelled its stock to new highs. However, Amazon is far from a risk-free investment. Bank of America analyst Justin Post recently took an in-depth look at the key themes for technology investors, and identified eight catalysts that are moving Amazon stock.
People love tech stocks.
Economic indicators suggest the technology sector is in the late stages of a cyclical bull market. Tech stocks, particularly Amazon and its FANG brothers Facebook (FB), Netflix (NFLX) and Alphabet (GOOG, GOOGL) have been some of the top performers of the nine-year bull market. Post says that the late stages of bull markets are driven more by momentum than valuation, suggesting FANG stocks like Amazon could continue to produce some of the best returns in the sector. Bank of America is calling for 2.7 percent U.S. GDP growth in 2018 and 29 percent year-over-year revenue growth from Amazon.
Amazon will have new cash to spend.
It’s not just about the money Amazon will save from corporate tax cuts. It’s about what it will do with that money. Amazon has a long track record of making smart investments, and Bank of America says Amazon will likely get a bigger boost from tax reform than the other three FANG stocks. Amazon is one of just a handful of the largest tech stocks Bank of America covers that should get at least a 20 percent earnings per share bump from tax reform in 2018, Post says. However, Amazon does not have a significant amount of overseas cash to repatriate.
Millennials have more spending power.
Every year continues the slow shift in consumer demographics, and millennials now have more spending power than ever before. Not surprisingly, Post says millennials have a much higher and faster adoption rate for new technology than consumers of older generations, a trend that is good news for innovative tech companies like Amazon. Millennials age 20 to 35 are estimated to earn a combined $3.6 trillion annually and spend roughly $1.3 trillion globally, accounting for about 11 percent of the global economy. By 2020, millennials and Generation Z will represent half of global wage earners.
E-commerce isn’t slowing down.
Despite major new competition from Walmart (WMT) and others, Amazon remains the gold standard of e-commerce. But just because Amazon has build a large competitive moat for its e-commerce business doesn’t mean it’s resting on its laurels. Amazon is investing heavily in the next generation of e-commerce, building its international business, integrating big data into its platform, expanding its fulfillment and logistics infrastructure and acquiring physical property as part of its omni-channel strategy. Post estimates global gross merchandise value in e-commerce sales will more than double from $2.1 trillion to $5 trillion in the next decade.
Streaming video is growing.
Not only has Netflix now become the clear leader in the streaming video space, Amazon faces major competition from Google’s YouTube and new social media streaming services like Facebook Watch. Post says this potential shift in video content consumption to social media platforms is a key theme to watch in the tech space in coming years. Bank of America estimates Amazon will spend more than $5 billion on digital video content in 2018. While that is a major financial commitment by Amazon, Post estimates both Netflix and Google will spend at least $7 billion each on content this year.
‘Alexa, buy Amazon stock.’
Amazon went hard and heavy promoting its Alexa voice assistant and its Echo smart devices this holiday season, and for good reason. Post says voice search is “potentially the most disruptive transition for the internet since mobile.” ComScore estimates that 50 percent of all internet searches will be performed via voice search by 2020. For Amazon, Google, Apple (AAPL), Sony Corp. (SNE) and any other companies with smart speaker devices, device sales are just the tip of the iceberg. Alexa provides Amazon with valuable data and integrates Amazon’s entire ecosystem right into customers’ homes.
Amazon is a leader in AI.
McKinsey estimates that 35 percent of Amazon’s e-commerce sales currently come from its product recommendation engine. Amazon has more than 5,000 employees devoted to developing artificial intelligence technology, and Post says Amazon is the best-positioned e-commerce company to benefit from AI. Amazon is already using AI to improve its search rankings and recommendations and optimize Alexa’s voice interactions with users. In addition, Amazon is making AI and machine learning key components of its data analytics package for cloud customers. AI could help businesses improve product development, collect and analyze data and even target advertisements.
Walmart is a serious rival.
Post says Walmart could be the biggest traditional retail disruptor of the year in the technology space. Amazon investors should take Walmart extremely seriously given the early returns on its omni-channel investments. Post estimates Walmart’s omni-channel sales could boost long-term comparable-store sales growth by 2 percent annually. Walmart is steering brick-and-mortar shoppers online, an effort that Post says will boost Walmart’s U.S. e-commerce market share from 5 percent to 6 percent in 2018. Amazon still has a slight pricing edge over Walmart at the moment, charging roughly 2 percent less overall for products than Walmart.com.
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8 Catalysts That Are Moving Amazon.com, Inc. (AMZN) Stock originally appeared on usnews.com
