Amazon.com (ticker: AMZN) has been in the spotlight this week, and not just because of its stronger-than-expected earnings results for the second quarter.
CEO Jeff Bezos — along with other Big Tech leaders — defended his company in an antitrust hearing before the House Judiciary Committee. As Amazon has grown into one of the largest companies in the world, regulatory scrutiny has become a risk.
Added to this are the concerns of potential overvaluation and competition, even as the company continues to churn out profits and hit record highs in the stock market. Shares have surged by 60% since the beginning of the year.
With all this recent attention, both good and bad, some investors may be wondering: “Should I buy Amazon stock? Here are a few points to help you decide:
— Amazon at a glance.
— Pros to buying.
— Cons to buying.
— Bottom line: Should you buy Amazon stock?
Amazon at a Glance
After the market closed on Thursday, Amazon reported quarterly revenue and earnings that beat analyst expectations — causing an after-hours-trading surge that continued into the regular session on Friday.
This is despite the fact that Amazon spent more than $4 billion in pandemic-related costs. That spending represented only a small fraction of the nearly $89 billion in net sales during the second quarter — a 40% rise, year over year — as a surge in online shopping due to the health crisis helped boost the company’s performance. Amazon earned $10.30 per share, far exceeding Wall Street estimates.
The results mark another quarter in a long series of earnings beats in Amazon’s history. The company has made the transition from an intermittently profitable business to one of the most impressive large-cap earnings growth stocks out there.
Its journey has been helped by growth in its Amazon Web Services (AWS) cloud division, Prime subscribers and sales of smart speaker Alexa-enabled devices — all on top of its most well-known business of selling almost anything you could imagine and delivering goods to customers’ doorsteps increasingly quicker.
Although the pandemic has helped Amazon boost its sales, the current environment has created such high demand that the company has experienced an increase in shipping delays and out-of-stock items, giving competitors room to edge in. That said, too much demand could be one of those good problems to have, and many investors have continued to buy the stock, sending shares to record highs this year.
Pros to Buying Amazon Stock
Over the long term, Matthew Fox, founder of >Ithaca Wealth Management, sees more pros to owning Amazon than cons. One of the advantages in owning the stock is Amazon’s management team, who Fox says are some of the smartest people in business and are long-term oriented — focusing beyond quarterly performance.
Amazon continues to see opportunities with the move to online shopping from people who don’t want to go to the traditional stores because of the pandemic, says JoAnne Feeney, portfolio manager with Advisors Capital Management.
Although Amazon’s e-commerce business is heavily dependent on the health of the consumer, Fox sees the company as diversified, with its exposure to the growth business of cloud computing and its foray into advertising.
“You’re getting exposure to one of the highest-quality growth companies in the entire world,” Fox says.
Mike Bailey, director of research with FBB Capital Partners, says Amazon’s long-term prospects include durable growth trends for global e-commerce, cloud computing and online advertising.
“Despite the run in Amazon shares, our sense is investors have yet to fully price in the potential upside from Amazon’s entry into the advertising business, which is growing quickly but currently is only a fraction of the size of Facebook and Google,” he says.
In the second quarter, Amazon’s “other” business category — predominately made up of advertising — reported $4.22 billion in revenue, a year-over-year increase of 41%.
Cons to Buying Amazon Stock
Amazon, which has a share price that is much higher above earnings expectations than the S&P 500 average, faces risks of overvaluation in addition to regulatory risks, Feeney says.
For her, risks for Amazon’s stock include slower-than-expected growth, which could be exacerbated by increasing e-commerce competition.
“The challenge is to maintain the pace of growth that is currently built into expectations,” she says.
Earnings growth expectations will eventually have to fall, Feeney adds. That doesn’t detract from current growth, but it does lessen the appeal of the stock overall.
From Bailey’s perspective, additional risks could include declining sentiment for ” FAANG” stocks — Facebook ( FB), Apple ( AAPL), Amazon, Netflix ( NFLX) and Alphabet ( GOOG, GOOGL) — along with rising regulatory concerns under a new president and a potentially L-shaped recession that drags on and lowers demand for e-commerce and cloud computing.
While Amazon has a dominant position in e-commerce, it is facing increasing direct-to-consumer online sales competition from a host of businesses both big and small. But because online sales still represent a relatively small — albeit growing — portion of total retail sales, it seems that there could be room for other players without posing a huge competitive risk for Amazon in the short term.
“The pie is so big, and Amazon can’t even eat a whole slice,” Fox says.
Plus, other players currently can’t match the vast array of items that Amazon sells, he adds.
“For both market segments, we view the current dynamics as a winners-take-all type of setting where scale matters,” Bailey says. “We view both Amazon and Walmart as gaining share over smaller competitors in e-commerce, while the top three cloud computing giants will likely extend their leads over smaller ankle biters.”
Bottom Line: Should You Buy Amazon Stock?
As a quality name with growth prospects, it seems like Amazon could be a buy for long-term investors.
Fox says that investors need to have Amazon in their portfolios over the long term. “You have to hold on to it or you have to buy,” he says.
For investors that don’t have any Amazon exposure, Bailey favors easing into a position gradually but stopping short of taking a full market weighting of the stock. For those investors holding a lot more than the company’s market weight, he suggests considering trimming positions to lock in some gains, especially if other FAANG stocks are a big part of your portfolio. People who don’t own any other FAANGs could take Amazon holdings closer to its market weight.
Feeney likes Amazon as a company, but she thinks there are less expensive ways to gain exposure to e-commerce and cloud trends, naming Zebra Technologies Corp. ( ZBRA) — which makes handheld bar code scanners — for the former trend and semiconductor maker Broadcom ( AVGO) for the latter.
Investors with a long investing horizon and looking for growth could benefit from buying AMZN. But because growth expectations are so high and there is a risk of overpaying for shares, those investors may want to consider buying during price dips.
In the meantime, stocking up on shares of other companies exposed to the same growth trends as Amazon might not be a bad idea either.
More from U.S. News