Amazon (AMZN) reported third-quarter earnings after the bell last Thursday, and strong sales growth had AMZN stock investors smiling.
Amazon’s actual earnings per share were 9 cents in the red, but that was in-line with expectations. Meanwhile, AMZN revenue soared 24% year-over-year and dwarfed estimates.
That was enough for an 8% jolt to Amazon stock in Thursday’s after-hours trading alone. And now, year-to-date gains for AMZN stock are nearly double the broader S&P 500, at over 44%.
Yes, shares of AMZN stock are still climbing higher, with little regard to “normal” valuation. With that in mind, should investors ride the uptrend in Amazon stock, or is it bound to come crashing down?
Here are the pros and cons for Amazon stock:
Sizzling Sales. In a broader landscape where so many companies are growing earnings by cutting costs instead of improving sales, big-time organic growth from AMZN is refreshing. Of course, big-time revenue growth has also become par for the course. Amazon has been doubling its revenue every three years or so, and has actually grown sales every quarter since going public 1997. AMZN also coupled its Q3 sales beat with an upbeat forecast for holiday sales.
Innovation. Amazon began as the world’s largest book store but went on to revolutionize shopping via its huge, low-priced e-commerce website that now has 30 million customers. It hasn’t stopped there, either. Amazon keeps adding more and more things to its wheelhouse via acquisitions and R&D. A few examples: streaming video, the Kindle line and the new Amazon Fresh grocery business. That kind of innovation is what’s driving sizzling sales growth and upbeat investor sentiment — and AMZN doesn’t look to be hitting the brakes any time soon.
Moat. While companies like Walmart (WMT) and Staples (SPLS) are working hard to gain a slice of the e-commerce pie, Amazon remains the clear leader — as seen by this eye-popping chart from The Wall Street Journal. While that lead in itself is important, it could also help Amazon (and AMZN stock) keep sprinting ahead. Take Amazon Fresh, for example. Household staples aren’t usually bought online, as they’re thought to be too big or too cheap to be worth the price of shipping. But there’s big-time potential for that market … and a good chance Amazon will be able to unlock it thanks to its scale and supply chain efficiencies. AMZN recently moved into a Procter & Gamble (PG) warehouse as part of its new program called Vendor Flex, for example.
Earnings. Expectations for Amazon earnings were falling heading into its report. Sure, AMZN managed to meet the lowered bar but that bar, once again, was 9 cents per share in the red. That means AMZN has posted a loss in three out of the last five quarters … and missed expectations in half of those. The question remains how long Amazon investors will be willing to bet on big-time earnings potential without seeing any real bottom-line results.
Razor-Thin Margins. At its core, AMZN is still just discount retailer. Sure, it has a loyal and large consumer base … but AMZN shoppers are there thanks to low prices. That means margins are thin, and that changing such a strategy will likely alienate consumers. Sure, revenue is growing rapidly in non-retail segments, like Amazon Web Services. The “Other” segment which includes AWS grew 56% in the most recent quarter. But while that’s a nice stat, the slower-growing, lower-margin segments still made up a whopping 94% of AMZN revenue.
Swinging Sentiment. The bottom line is that Amazon stock is riding optimistic investor sentiment more than anything else. Sure, that sentiment seems tied to sales growth, but even a sales miss in Q2 led to only a small sell-off … and AMZN stock quickly regained its losses and then some. The problem is that sentiment is much harder to forecast than … say … actual earnings, and it could swing in a second. The slightest sign of slowing sales could send Amazon stock investors rushing to protect their big-time profits.
While he innovative focus of AMZN CEO Jeff Bezos has put a crunch on earnings, that’s better than having earnings and investor interest slide because of a lack of innovation (I’m looking at you, Apple [AAPL]).
Besides, Amazon is slated to post a profit for the full-year … and is expected more than triple its EPS from 2013 to 2014 alone. Toss in 36% annual earnings growth slated for the next half-decade, and it becomes clear that AMZN stock isn’t being bid up completely on hot air.
So while shares of Amazon stock do look a bit over-extended at the moment, I wouldn’t hesitate to jump in on a pullback and ride this investor favorite.
As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.