Amazon.com (ticker: AMZN), in the more than 26 years since its founding, has been largely defined by its creator and longtime CEO Jeff Bezos, who also doubles as the world’s richest person.
Well, it looks like a new chapter is underway at the e-commerce giant all these years later. In its holiday quarterly earnings announcement, Amazon also revealed that Bezos would be stepping down as CEO in the third quarter. Andy Jassy, the head of the cloud-computing division Amazon Web Services, will succeed the legendary executive.
Considering a dizzying mix of factors at play in the stock — including antitrust concerns, an incredible holiday quarter and strong price momentum — it’s understandable for investors to ask themselves, “Should I buy Amazon stock?”
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Amazon at a Glance
The most recent quarterly earnings report for Amazon, which encompassed the last three months of 2020, didn’t just beat analyst expectations, it demolished them.
In the fourth quarter, Amazon reported revenue of $125.6 billion, up 44% from the same quarter a year before. It marked the first $100 billion quarter in company history less than a week after Apple ( AAPL) accomplished the same feat. Net income, meanwhile, more than doubled year over year, advancing from $3.3 billion to $7.2 billion.
Analysts were expecting revenue of $119.7 billion and earnings per share (EPS) of $7.23. EPS clocked in at $14.09.
The massive 44% surge in revenue was driven largely by its international segment. For a company of Amazon’s size to still be putting up growth numbers like this is beyond remarkable. Driven by an Amazon culture, built by Bezos, obsessed with customer satisfaction, Amazon’s long-term strategy of prioritizing growth and customer retention over short-term profits saw the company put up years of big losses before the business became consistently profitable.
But investing in best-in-class logistics also brought about Amazon Prime, one-click purchases and one-day shipping. The unrivaled convenience of Amazon Prime has driven the business to more than 100 million paying Prime members.
The cloud computing division, Amazon Web Services (AWS), enjoys large margins that most other e-commerce competitors can only dream about. That’s an enviable competitive advantage that will be touched on in more detail below.
Amazon made the best of a bad situation in 2020, and it has the earnings to prove it. Its two most important segments — AWS and online shopping — should continue to expand as the pandemic and the effects of working from home linger on into the future.
Pros to Buying Amazon Stock
Historically, one of the big advantages to owning AMZN stock has been Amazon’s elite management team. Bezos in particular has always emphasized Amazon’s long-term focus, its obsession with the customer and its devotion to innovation at almost all costs. These are more than just words, as the company’s track record will indicate. You don’t go from online bookseller to multitrillion-dollar corporation and tech giant without hitting home run after home run.
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, and aside from its blowout fourth-quarter earnings, AMZN also projected first-quarter revenue between $100 billion and $106 billion, a meaningfully larger figure than the consensus $95.8 billion expectation. On Wall Street, a shiny future is worth even more than an impressive previous quarter.
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. Amazon’s long-term prospects include durable growth trends for all three categories: global e-commerce, cloud computing and online advertising.
Of these three, the first two tales are well-trod and widely acknowledged by investors for years now. Advertising is a real growth opportunity, however, with Amazon increasingly seizing share in product searches from Alphabet’s ( GOOG, GOOGL) Google.
Amazon’s so-called “Other” category, made up mainly of the company’s advertising business, brought in solid revenue in the fourth quarter.
As for AWS and its famous margins, they continue to expand. Last quarter, its operating margin was 28%, up from 26.1% the year before. While the e-commerce division is much larger in terms of revenue, its slim margins mean that AWS can carry most of the burden when it comes to operating income. Last quarter, AWS accounted for nearly 52% of the company’s overall operating income, despite accounting for about 10% of company revenue.
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Cons to Buying Amazon Stock
While the fourth quarter was a successful one for Amazon, the company faces risks of overvaluation in addition to regulatory risks.
The stock currently trades for nearly 100 times earnings, and Amazon’s 44% revenue growth last quarter sets a tough precedent for growth going forward that will be hard to keep up with. Even though first-quarter projected revenue implies between 33% and 40% growth, it’s pace that will likely be tough to match in later quarters as AMZN laps some of its blockbuster 2020 quarters.
With AMZN’s stock price up nearly 70% in the last year, there’s little room for error moving forward. And, of course, the transition in the C-suite from Bezos to Jassy was a surprise to markets. Jassy has been running AWS for years now and is viewed as a competent successor, but all the same, some acts that are impossible to follow. Bezos, who has proven to be one of the best allocators of capital ever, falls into that category.
Additional risks could include declining enthusiasm for the ” FAANG” stocks — Facebook ( FB), Apple, Amazon, Netflix ( NFLX) and Google. The tech giants also face rising regulatory concerns that are increasingly bipartisan. Amazon itself is currently under scrutiny from both U.S. and European Union regulators.
Walmart ( WMT) and Target ( TGT) are both real e-commerce competitors for Amazon in the U.S., while individual vendors and brands also threaten to do more direct-to-consumer business online, cutting out Amazon as well. Microsoft ( MSFT) and Alphabet are Amazon’s main rivals in cloud computing.
Bottom Line: Should You Buy Amazon Stock?
There’s no doubt that Jeff Bezos stepping down is big news. But investors who are worried about the direction of the company don’t truly have much to stress over. For one thing, Bezos will move to become executive chairman on the board, so he’ll still exert enormous influence over the company. And second, he has groomed Jassy as a successor, and he has high confidence in his abilities to move AMZN into the future.
Even with Bezos stepping down as CEO in the second half of 2021, the company is firing on all cylinders and has better growth prospects than most companies just a fraction of its size. It’s a must-own for long-term investors, and still a “buy” almost 27 years after its birth.
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Should You Buy Amazon (AMZN) Stock? originally appeared on usnews.com
