Amazon.com, Inc. (AMZN) disappointed the market last week, reporting fourth-quarter earnings below consensus estimates. Eager investors had bid up AMZN stock as high as $638 on Thursday, but the stock then tumbled in after-hours trading and opened at just $572 on Friday morning.
AMZN stock is now down 22% since the beginning of the year. Is the Amazon growth engine finally starting to run out of steam, or does this slump represent a possible buying opportunity for growth-minded investors?
It’s more likely the latter. Amazon may have disappointed on earnings, but its fourth quarter earnings were still more than double that of the year before. The performance of Amazon stock in the short-term may be defined more by the immediate expectations of a prickly market, which can sometimes be unreasonably high, than by the company’s long-term business prospects, which remain stellar.
AMZN Stock: An E-Commerce Growth Story
According to the St. Louis Fed, e-commerce accounted for $87 billion in sales during the third quarter of 2015. Online retail is still in its infancy, as this $87 billion still represents only about 7.4% of total retail sales over that period. The market research firm eMarketer projects that e-commerce will account for 9.8% of retail sales by 2019, amounting to over $548 billion in revenue.
Amazon is positioned to continue riding the wave of e-commerce as it disrupts traditional brick-and-mortar retailers. AMZN commands a strong lead in the U.S. market, accounting for over 36% of Cyber Monday sales in November. Amazon Prime is growing its membership at lightning speed, rising by 35% last year to 54 million subscribers, according to Consumer Intelligence Research Partners (CIRP). Prime has grown much faster than expected; back in 2013, analysts were estimating 25 million subscribers by 2017.
To be sure, we don’t know exactly what the true count is, since AMZN is notoriously tight-lipped on the subject. But considering the company added over 3 million members in the third week of December alone, we know the numbers are substantial.
Amazon Prime membership costs $99 a year, AMZN stock owners don’t just love Prime members for their annual subscription fees: Amazon Prime subscribers spend more than nonsubscribers, since they are less inhibited by shipping costs. They will likely move more and more of their online spending to Amazon. A report from CIRP last year estimated that Prime members spend $1,500 a year on Amazon, compared to $625 for non-members.
Amazon isn’t just limiting itself to music, books, movies and TV; with Prime Pantry and AmazonFresh, Amazon is getting into the grocery business.
Amazon Web Services: Fast-Growing, Yet Highly Profitable
By now you may be thinking that Amazon is priced a bit too extravagantly for a company in the low-margin retail business. But AMZN stock is just as much a tech play as a play on retail. The lion’s share of Amazon’s operating income in the fourth quarter of 2015, or 40%, was actually generated by Amazon Web Services, the cloud-based enterprise solutions part of Amazon.
AWS revenue increased a whopping 69% year-over-year in the fourth quarter. This is in a business where Amazon can enjoy a healthy margin, yet keep costs down as it achieves economies of scale, which will help deter the entry of new rivals. And its a big reason AMZN stock isn’t valued like its retail foes Walmart (WMT) and Target (TGT). Deutsche Bank (DB) estimated that Amazon Web Services could reach $16.2 billion in sales by 2017, which would value AWS alone at $160 billion.
Growth Investors: Add Some AMZN Stock to Your Cart
Amazon is a growth machine, an excellent way to take advantage of two trends; the growing shift from brick-and-mortar to online retailing and the move to cloud computing in business. The firm may be big, but a lot of room for growth still exists, and now is not the time to bet against Amazon.
As of this writing, Lucas Hahn did not own any of the aforementioned securities
