For years, Amazon.com, Inc. (AMZN) was the Donald Trump of the stock market — loud and blustery, loved by many, but lacking substance, or in its case, earnings.
Now the company is becoming consistently profitable, and Amazon stock is starting to soar again.
Consider: in 2012 and 2014, AMZN failed to turn a profit. Per-share earnings have improved year over year just twice since 2010.
Nevertheless, Amazon stock more than tripled during that time. Sales growth that was routinely well north of 20% helped. So did Amazon’s widespread name recognition and popularity with mainstream America.
On the heels of three straight quarters in the black, including a Cyber Monday-fueled, record-shattering fourth quarter of 2015, Amazon appears to finally be learning how to make money.
And after a sharp decline during the January and early February market downturn, AMZN stock is back on the uptick.
Decline in Amazon Stock = Buying Opportunity
After a banner 2015 in which the stock rose nearly 119% — or about 119% more than the S&P 500 — AMZN shares hit a wall when the calendar flipped to 2016. From its all-time peak of $694 on Dec. 29, the stock fell $212 in 42 days, bottoming at $482 on Feb. 9. If you bought then, you’ve already made out quite well.
Turns out that precipitous decline was little more than a momentary blip; since Feb. 9, Amazon stock is up 24%, and is knocking on the door of $600 again. It looks now like AMZN’s six-week nosedive was purely the product of an ailing market. When the dust started to clear in early February, investors saw a stock they’d loved for years suddenly trading at a deep discount relative to the previous six months.
Though fourth-quarter earnings fell short of high analyst expectations, once investors got over their disappointment regarding the miss, they realized how strong Amazon’s financial performance was in 2015.
If you believe analyst projections, it’s only going to get better: earnings per share are expected to reach $4.79 this year, more than it has earned in the last five years combined.
And there are plenty of other things to like about AMZN besides the increasingly healthy balance sheet.
First and foremost: Amazon Web Services. Amazon’s burgeoning cloud computing business now has more than 1 million customers worldwide and brought in $2.4 billion in revenue in the fourth quarter — up 69% from the previous year, and more than double the growth rate of cloud competitors Salesforce.com, Inc. (CRM), VMware, Inc. (VMW) and Microsoft Corporation (MSFT), according to a study conducted by FactSet.
Amazon Web Services also has better operating margins than Salesforce, HP Inc (HPQ) or NetApp.
Put simply, Amazon Web Services is the single biggest reason why Amazon has finally become a profitable enterprise. But it still only accounts for roughly 7.5% of the company’s sales. Amazon is still the largest online retailer in America; its original streaming video content is starting to gain traction, with award-winning shows such as “Transparent” and “Mozart in the Jungle”; and the company still has designs on leading the drone delivery charge.
New Rally for AMZN Underway
In an era when Apple has seemingly run out of new ideas beyond the latest iPhone or iPad upgrade, Amazon — and its founder Jeff Bezos — are perhaps the premier innovators in an ever-expanding tech world. Having such a diversified business model means AMZN isn’t overly dependent on any one segment of its business.
Now that business is profitable, and the company’s promises of becoming a moneymaking venture no longer sound about as flimsy as Donald Trump’s vows to “build a wall.” There’s some substance behind Amazon’s growth these days.
No longer relying solely on double-digit revenue growth and investor fervor, Amazon the company is actually growing profits. And that’s good news for Amazon stock.
I say buy more of it now before it reaches record heights again.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
