A few days ago, I took you through the nine things that tell you if a stock is worth buying where I discussed things like stock price, earnings per share (EPS), and dividend among others.
Today, let us look at Amazon’s (AMZN) stock and company as a whole to determine whether it is worth investing in.
Currently, Amazon is one of the top five largest companies in the world with a market capitalisation of $1.641 trillion.
As other companies experienced losses and had their stock prices plummeting during the COVID-19 pandemic, Amazon was experiencing the exact opposite as demands for their services spiked high, so high that the company is getting more shipping delays and items running out of stock.
Every business is striving to have high demands for its products, which means more sales that translate into profits so this is a good thing for Amazon.
What is not good is the antitrust hearing that is before the House Judiciary Committee where Amazon together with Big Tech companies Apple and Google are being quizzed about their practices of unfair competition in the industry.
Nevertheless, Amazon’s share price has surged by 60% since the beginning of the year, currently trading at $3,276.53 by the time of this writing, the fourth most expensive stock price in the world.
With all this, the question, “Should I buy Amazon stock?” must be lingering in your mind. There are about four important points that can help you make your decision namely; looking at Amazon at a glance, pros and cons to buying Amazon stock, and the bottom line.
Amazon at a Glance
Three months ago, Amazon reported blowout financial results in Q2, crushing Wall Street estimates with nearly $89 billion in net sales despite spending more than $4 billion in pandemic-related costs.
The e-commerce giant’s performance, which saw a 40% rise year-over-year, was boosted by increased online shopping due to the COVID-19 pandemic that prevented people from buying items from traditional retailers. Amazon earned $10.30 per share.
On Thursday, October 29, 2020, the company will release its Q3 FY 2020 report and investors are eagerly waiting to see if it will continue to grow as expected by analysts.
Analysts expect Amazon’s EPS to rise 72.1% in Q3 FY 2020 and revenue is estimated to grow by 32.3% to $92.6 compared to the year-ago quarter. If the estimates are to go by, Amazon is a profitable company that keeps beating estimates every other quarter.
Apart from its flourishing e-commerce business that sells almost anything, Amazon’s Cloud Computing business the Amazon Web Services (AWS), music and Video on Demand division the Amazon Prime and Alexa-enabled devices, and online advertising are also performing well, contributing highly to the company’s revenue earnings.
Pros of Buying Amazon Stock
Analysts like Ithaca Wealth Management founder Matthew Fox say that the pros of owning Amazon stock outweigh the cons over the long term. Fox says that the company’s management team is comprised of some of the smartest people in business, focusing on the long-term way beyond the company’s quarterly performance.
Amazon’s expansion into other services like the growing cloud computing through their Amazon Web Services and other products mentioned above mean that Amazon has one of the highest growth stocks in the world. Wouldn’t you want to have a share of that?
FBB Capital Partners Director of Research, Mike Bailey says Amazon’s long-term prospects include durable growth trends for cloud computing, global e-commerce, and online advertising.
Bailey says that although Amazon’s online advertising business doesn’t compare to the size of social media giant Facebook and search giant Google, it is growing quickly, and it largely contributed to the reported $4.22 billion in revenue in Q2 FY 2020. This was a year-over-year increase of 41%.
Cons of Buying Amazon Stock
JoAnne Feeney, a portfolio manager with Advisors Capital Management says that Amazon faces risks of overvaluation of their stock because its share price is way higher above earning expectations than the S&P 500 average.
Feeney adds that Amazon could have a slower-than-expected stock due to the increasing e-commerce competition.
Just because Amazon dominates the e-commerce industry doesn’t mean that it has no competition. A host of both big and small companies dealing in direct-to-consumer online business are competing with Amazon to provide direct-to-consumer online services, although it is not a huge competitive risk for Amazon in the short term.
This competition may slow down the expected Amazon stock growth, but it should be noted that no other e-commerce player matches the enormous array of items that Amazon sells.
“Earnings growth expectations will eventually have to fall. That does not detract from current growth, but it does lessen the appeal of the stock overall,” Feeney explains.
Amazon’s real competitor in the U.S. is Walmart, and the company’s competitors in cloud computing are Microsoft and Alphabet, the parent company of Google.
“Both Amazon and Walmart are gaining share over smaller competitors in e-commerce, while the top three cloud computing giants (Amazon, Microsoft, and Alphabet) will likely extend their leads over smaller ankle-biters,” Bailey says.
Bottom Line: Should you buy Amazon stock?
As discussed above, Amazon seems to have it all. The brand recognition, the competitive advantage, a great management team that makes sure the company is steered towards achieving its long-term goals.
A company like that is worth investing in for investors with long-term goals. Buy and hold, or if you already bought, hold on to that valuable Amazon stock for it is expected to keep growing.
Amazon stock price is expensive, and there are other considerably less expensive options listed on the stock market but they do not have the size and growth expected of Amazon. Remember, bigger most times means better.