For Amazon.com, Inc. (AMZN) stock 2015 has been a year for the books. At the time of this writing, it was the second-best performer in the entire S&P 500, boasting returns of 115% year to date.
It’s hard to follow a showing like that. While 2015’s gains will be tough to match in 2016, there’s no reason to believe the AMZN stock price can’t keep going higher.
In fact, Amazon will emerge from 2015 as a company transformed, as it seems to have finally entered a period of sustained profitability. But, just because AMZN stock holders are finally starting to see some black ink doesn’t necessarily mean shares are destined to outperform again…although I happen to think they will.
As we enter 2016, let’s take a look at the factors that will drive the stock price in the coming year:
Mind the Valuation
AMZN stock has sustained a sky-high P/E multiple over several decades. The stock currently trades for more than 968 times trailing earnings and nearly 120 times forward earnings. It ain’t cheap, folks.
This astronomical multiple makes AMZN stock more vulnerable to market downturns, and even slight earnings misses can be devastating to the share price. Analysts expect Amazon stock to earn $5.63 per share in 2016; if it whiffs by 50 cents, that’s $60 (120 x $0.50) off the share price from the get-go.
But, if AMZN misses full-year EPS by 50 cents, the greater risk would actually be multiple contraction: Suddenly the market might only be willing to pay 80 times 2016 earnings (which, in this example, are $5.13), sending shares all the way down to $410, a roughly 40% fall from today’s levels.
It works the other way, too, of course. Amazon has beaten earnings estimates by a combined 92 cents in its last four quarters, which, combined with its lofty multiple, drove the AMZN stock price from the low $300s to upwards of $670.
Amazon Web Services (AWS)
If I had to choose one awkward acronym to describe Amazon’s remarkable stock market rally of 2015, “AWS” would take the cake. Amazon Web Services, the company’s enterprise-facing cloud-computing segment, has been a miraculous growth engine.
By several objective measures, AWS is in a league of its own. Gartner estimates the cloud server capacity of AWS at 10 times the next 14 competitors combined, with five times the storage capacity of those same 14 companies.
It’s a good thing Amazon has all that extra room to grow AWS, because it’s absolutely necessary. In the last two quarters, AWS revenue has grown by 81% and 78% year-over-year, respectively. In the quarter ended in September, AWS revenue reached $2.08 billion.
Deutsche Bank (DB) thinks Amazon Web Services could be worth $160 billion as a standalone company, and it’s the fastest-growing multibillion-dollar enterprise IT company in the world. Salesforce (CRM), SAP (SAP), Alphabet (GOOG, GOOGL) — these are mere mortals.
The high margins of AWS are what make it so enormously valuable to Amazon the Retailer. Amazon has been sacrificing margins for volume for years, but it wasn’t until 2015 that a sugar daddy emerged elsewhere in the company to finance this strategy sustainability.
Last quarter, AWS accounted for 8.2% of Amazon’s revenue and 52.5% of its operating income.
Daddy’s home.
Dom in E-Com
That brings us to the most obvious catalyst for AMZN stock: its underlying dominance in e-commerce. A 2015 study found that 44% of online shoppers began their product searches on Amazon.com, skipping search engines (34%) and specific retail websites (21%) entirely. In 2012, just 30% of online shoppers began on Amazon.
Recent numbers from Slice Intelligence show Amazon accounted for 39.3% of U.S. e-commerce spending between Nov. 1 and Dec. 6 — or as much as the next 21 retailers combined. That’s up from 37.9% in 2014. With e-commerce growing at the expense of brick-and-mortar retail, what better stock to invest in than AMZN, which was built from the ground-up specifically for e-commerce?
The shift to online shopping from brick-and-mortar won’t reverse itself in 2016. Consumers will always prefer convenience, and AMZN understands that very well.
By pushing its mobile devices — year-over-year sales of Amazon devices tripled during the Black Friday weekend — it’s getting the public hooked into its ecosystem while controlling the mobile shopping experience. It’s making big investments in its delivery network to make it faster and more efficient, and is expanding its Prime Now one-hour delivery to cities across the U.S. It’s even advertising a drone delivery service that can get items to your door 30 minutes after placing an order.
Going into 2016, it’s never been more clear that Amazon is the future of retail. Yes, the valuation is a bit gaudy, but you get what you pay for: There’s not another company on the planet quite like it. AMZN stock was a good buy at the beginning of 2015, and it will still be a good buy at the beginning of 2016.
It’s great that the company is so long-term oriented, too, which trumps myopia any day of the week. Take it from CEO Jeff Bezos, who was asked in 2009 how Amazon had enjoyed a great year despite a horrible economy:
“I always tell people, if we have a good quarter it’s because of the work we did three, four, and five years ago. It’s not because we did a good job this quarter.”
It’s true, and Bezos’ modesty is refreshing. Still, Amazon looks primed to keep putting together “good” quarters in the year ahead.
As of this writing, John Divine was long AMZN stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
