News & Analysis

Is Amazon (still) a good investment?

15 Jul 2021 | by: Anna Farley

Is Amazon (still) a good investment?

Multinational tech firm Amazon (NASDAQ: AMZN) is now a household name worldwide and there’s a very good reason for that.

The consumer behemoth is a major presence in a whole host of different areas. Indeed, for many years now, it has led the way in everything from e-commerce and digital streaming to cloud computing and artificial intelligence.

Amazon’s e-commerce website, which initially only sold books, has ballooned over the years. It’s now the world’s largest marketplace, selling an astounding array of products from games to toilet roll.

In fact, its’s commonly known as “The Everything Store” thanks to its incredible diversity of products.

Founded by Jeff Bezos in 1994, Amazon has come to dominate the tech industry – becoming one of the so-called “Big Tech” companies or “Big Five” alongside the likes of Facebook (NASDAQ: FB), Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ:GOOGL).

And currently, the company is trading at all-time highs after a pandemic-induced buying spree the world over triggered a rapid increase in its sales throughout 2020 and into this year.

Here, we look at whether the enormous profits early investors in this millennium’s biggest business success story have enjoyed can continue once we return to “normality”.

Indeed, with Bezos also relinquishing some of his control recently, stepping down as CEO after a long, controversial tenure, it’s worth revisiting the company’s fundamentals and asking if Amazon is still a good investment at its current price in 2021?

Fundamentals of Amazon stock

Amazon’s share price at time of writing is $3,696.58, its highest point so far. The price is up 97% since the start of 2020 after the pandemic triggered a rush to buy giants like Amazon that appeared to be weathering the storm.

The price-to-earnings ratio at time of writing is 70.35x. The high number is expected given the company’s popularity and rising share price. It also has a 4.514x price-to-sales ratio, down from its maximum of 5.559 back in September .

The stock grew further in popularity as lockdowns and unease around enclosed spaces led to a boom in e-commerce. Amazon’s digital streaming business also prospered with so many people stuck at home and looking for new content to watch.

In 2020, annual net sales jumped more than $100 billion to $386.1 billion from $280.5 billion in 2019. Those 2019 figures themselves were also an improvement over 2018’s $232.9 million of total net sales.

The trend has continued, with total net sales in Amazon’s first quarter up 44% to $108.5 billion from $75.5 billion the year before, beating consensus. Meanwhile, net income per share trebled to $15.79 compared to $5.01 per share in the same quarter of 2020. Operating income more than doubled to $8.9 billion from $4.0 billion.

For the second quarter, the company is guiding for a between 24% and 30% increase in net sales year-on-year to between $110.0 billion and $116.0 billion.

Amazon expects to post operating income of between $4.5 billion and $8.0 billion versus $5.8 billion in second quarter of 2020.

What is the bull case for Amazon?

One of the most important numbers out there when it comes to Amazon is the fact that there has been an explosion in Prime members to 200 million from 150 million at the start of 2020.

These users not only pay their $119 per year ($12.99 a month) fee, but also spend more on Amazon than non-Prime members.

And, while the beneficial effects of the pandemic on e-commerce may lessen over time, the end of the pandemic will also bring an end to the company’s own pandemic-related costs. The firm expects to have to pay out approximately $1.5 billion of Covid-19 related costs in the second quarter.

Broadly speaking, Amazon’s financials are extremely compelling, with continued net sales growth – culminating in a phenomenal 2020.

A key driver has been the rising popularity of online shipping. Statista forecasts a rise in global e-retail revenues to $5.4 trillion in 2022 from the 2020 figure of $4.28 trillion.

Given Amazon’s prominence in this area, it stands to see a huge benefit from the shift away from brick-and-mortar stores.

Moving on from shopping, and there’s Amazon Web Services (AWS), the firm’s cloud computing platform, which continues to grow. AWS delivered net sales of $45.4 billion in 2020, up from $35.1 billion in 2019. AWS net sales in the first quarter rose 32% year-on-year to $13.5 billion, and its very impressive 30% operating margin is another huge selling point.

No wonder, then, that it was AWS boss Andy Jassy who took over as chief executive. With Jassy having headed up the thriving AWS unit since 2003, there’s reason to be confident in the company’s leadership

Add to that Bezos’ decision to remain as chair, and the firm looks set to stay the course.

What is the bear case for Amazon?

Still, there are reasons to be cautious when it comes to Amazon. For one, even the well-managed handover to a new chief can bring some degree of instability.

On top of that, Amazon is facing pressure in the US from House lawmakers who have put forward bipartisan legislation with the hope of putting new limits on Amazon and other Big Tech firms.

But these bills, announced in early June, would make it unlawful for Amazon to privilege its own products on its platform.

Not only that, but it would also be unlawful for the company to own any businesses that used its platform to sell products or services.

While these measures would face an uphill battle in securing enough Republican support, as the party is generally opposed to altering antitrust rules, seven Republicans already back the bills.

Outside of potential regulatory trouble, the world is also opening up more and more as countries wind down coronavirus measures. This means more people going outside or to the cinema, and more people shopping in physical stores.

While this is to be expected, and brings some benefit in the ending of the company’s own covid-related costs, the e-commerce boom brought on by the pandemic is likely to taper off.

Indeed, it is worth noting that the bottom end of Amazon’s second quarter guidance is less than the prior year figure, indicating the possibility for things to slow down in 2021.

Competition is also worth considering. Amazon Prime Video competes with Netflix and Disney (NYSE: DIS) offering Disney+, among others. Likewise, AWS competes with Google Cloud and Microsoft Azure.

Each of these factors is worth considering when weighing up whether to invest right now.

Should I invest in Amazon stock?

As a long-term bet, there’s definitely a case for buying Amazon stock. And that’s even with the high prices at the moment.

While things may not be entirely smooth-sailing for the firm all the time – with competition, regulation, and a big leadership change – it’s likely that the behemoth can weather storms if they arise.

The incredible size and scope of the company, combined with an increasing appetite for online shopping, make it worth considering for any portfolio.

Valuethemarkets.com, Digitonic Ltd (and our owners, directors, officers, managers, employees, affiliates, agents and assigns) are not responsible for the content or accuracy of this article. The information included in this article is based solely on information provided by the company or companies mentioned above.

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

  • Anna Farley does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.
  • Anna Farley has not been paid to produce this piece by the company or companies mentioned above.

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