It’s certainly been an amazing year for Amazon (AMZN), which has fired off 66% gains so far this year to surge to a market capitalization of $241 billion. For context, that’s roughly $10 billion more than brick-and-mortar rival Walmart (WMT) — which, by the way, is off some 16% in the same period.
But what investors want to know is: Will that momentum continue, or is Amazon stock about to crash from the Street’s now-momentous expectations?
AMZN has stood out, even among its large-cap peers, because of the company’s continued torrid affair with rapid growth.
In the latest quarter, Amazon handily beat expectations as its revenues jumped by 20% year-over-year to $23.2 billion, and profits came to 19 cents per share of Amazon stock. The Street consensus was for revenues of $22.39 billion and a loss of 14 cents per share.
Amazon’s top line isn’t dependent on just selling goods out of its online stores. AMZN has leveraged its massive IT platform to provide cloud services through Amazon Web Services, which posted revenues of $1.82 billion in the quarter, up a sizzling 81%. Much of that found its way to the top line, as AWS operating income reached a hefty $391 million, up from $77 million in the same period a year ago.
AMZN still has loads of untapped potential in foreign markets, too, and the e-commerce giant plans to enter India’s massive market.
Amazon’s ambitions are clear, as the company has made other wagers on outsized market opportunities, such as in streaming media, a market experiencing wrenching disruption from over-the-top services like Netflix (NFLX).
But Amazon’s ambitions go beyond this. For example, AMZN gets lots of synergy with its hardware offerings, such as Kindle and Amazon Fire TV stick. And while entering these markets is incredibly expensive, Amazon has proven to be a disciplined spender. If anything — and as Amazon Web Services demonstrates — AMZN may be on the cusp of much higher profitability.
Which is why Bernstein analyst Carlos Kirjner is bullish on Amazon stock in his most recent research report, pointing out the higher boost to Amazon from increased margins in AWS and improvements to Amazon’s streaming business.
Amazon should also benefit from its aggressive investments with its fulfillment platform, and especially with cost savings thanks to more efficient robotics.
Now it’s true that the Amazon stock price is far from cheap; shares trade at more than 100 times earnings estimates for next year. Still, AMZN is growing at 20% per year on the top line (compared to pretty much static growth at WMT), and its surprise Q2 profits are a promising sign for Amazon’s usually depressing bottom line.
All in all, Wall Street has no problem paying a premium for growth, as seen with companies like Netflix, Facebook (FB) and Google (GOOG, GOOGL). The company has made substantial investments in its massive platform and is targeting some of the world’s hottest markets in e-commerce, new media and cloud computing, which should provide for sustainable long-term growth.
And Wall Street will keep paying as long as Amazon stock can keep up the momentum.
So far, so good.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.