AMAZON.COM (TICKER: AMZN) has been in the spotlight quite a bit this quarter, and not always under happy circumstances.
CEO Jeff Bezos — along with other Big Tech leaders — defended his company in an antitrust hearing before the House Judiciary Committee at the end of July. It was a stark reminder for shareholders that while Amazon has grown into one of the largest companies in the world, regulatory scrutiny has become a serious risk.
Added to this are the concerns of potential overvaluation, even as the company continues to churn out profits and hit record highs in the stock market. Shares are up by about 73% since the beginning of the year.
With all this attention, both good and bad, investors may be wondering, “Should I buy Amazon stock?”
Amazon at a Glance
After the market closed Thursday, Amazon reported third quarter revenue and earnings that didn’t just beat analyst expectations — they demolished them.
Over the course of the third quarter, Amazon made $96.1 billion in net sales — a 37% increase compared with the $70 billion the company made during the same quarter in 2019. As for the bottom line, Amazon’s net income tripled to $6.1 billion in the third quarter, or $12.37 per diluted share — well up from $4.23 per share in the same quarter last year.
On the earnings call, Amazon management noted that the increase in online shopping due to the COVID-19 pandemic helped boost the company’s performance. One of the highlights of the quarter was the company’s annual Prime Day. Though the yearly sitewide sale was delayed to October from its usual date in July, Prime Day was a success, especially for small and midsize businesses selling on Amazon’s platform. Third-party sellers saw “more than $3.5 billion in sales over the two-day global event,” CFO Brian T. Olsavsky said during the earnings call. “That’s a 60% increase compared to Prime Day last year.”
While online shopping contributed to Amazon’s impressive quarter, the company’s biggest winner was its Amazon Web Services cloud division. AWS reported $11.6 billion in sales, a 29% jump from the third quarter of 2019, and the same growth rate from the second quarter. Companies around the world continue to utilize Amazon’s cloud solutions to keep their businesses running during the pandemic. As a result, Amazon has only profited from the work-from-home boom.
Amazon has made the best of a bad situation in 2020, and it has the earnings to prove it. Its two most important segments — Amazon Web Services and online shopping — will continue to enjoy big gains as the pandemic extends into winter. And with the holiday shopping season approaching, analyst expectations are high that Amazon will continue to see big gains in sales and profits alike into 2021.
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, which Fox says includes savvy business leaders who are also oriented toward the long-term instead of mere quarterly performance.
Amazon continues to see opportunities with the move to online shopping from people who don’t want to go to brick-and-mortar stores because of the pandemic, says JoAnne Feeney, portfolio manager with Advisors Capital Management.
Although Amazon’s e-commerce business heavily depends on consumers’ economic health and spending, the company is 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.
“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,” Bailey says.
Amazon’s so-called “Other” category, made up mainly of the company’s advertising business, brought in a solid $5.4 billion in revenue in the third quarter. That’s up 51% over the same quarter last year, and it seems to indicate that Amazon will continue to profit from its intimate knowledge of a huge customer base.
Cons to Buying Amazon Stock
While the third quarter was a successful one for Amazon, the company faces risks of overvaluation in addition to regulatory risks, Feeney says.
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,” Feeney says.
Amazon is expecting that the fourth quarter could bring in anywhere from $112 billion and $121 billion — or 28% to 38% growth over the fourth quarter last year, while analyst consensus stands at $112.3 billion. Amazon needs to sustain these rates of growth in order to justify a price-earnings ratio of over 123 — well above where it stood at 78 just a year ago.
Additional risks could include declining enthusiasm for the ” FAANG” stocks — Facebook ( FB), Apple ( AAPL), Amazon, Netflix ( NFLX) and Alphabet ( GOOG, GOOGL), Bailey says. The tech giants also face rising regulatory concerns under a potential new president, and a potentially protracted, “L-shaped” recession that saps 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 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 can’t yet 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?
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.
Amazon is the biggest name in online retail, and only continues to get bigger. Great growth prospects heading into the holidays, coupled with a diversified business model that continues to profit during the pandemic, means Amazon is a buy today.
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