Why Amazon.com, Inc. (AMZN) Is Still Your Best Bet in 2016

Retail dominance and AWS make this pick a winner

Amazon.com, Inc. (NASDAQ:AMZN) is the king of retail. It’s the first click for those shopping online, and AMZN stock is the first name investors turn to when seeking a consumer play with consistent growth.

amazon stock amzn
Source: Grab Media

Unfortunately, over the past three months or so, Amazon stock has fallen on hard times. Shares are off almost 20% since the beginning of December, and just a few weeks back AMZN stock investors were disappointed by fourth-quarter earnings.

The resulting declines have caused some to write off this e-commerce giant in 2016 as just another overpriced tech name. However, those who underestimate Amazon have been proven painfully wrong in the past, as they will again in 2016 when this temporarily troubled retail giant returns to favor.

In reality, Amazon.com is the best consumer play on earth, as well as a bold bet on the future of cloud computing and the Internet. Here’s why investors can still rely on this high-growth play from here on out.

AMZN Stock Miss Is Overblown

Amazon.com, Inc. faded at the start of the year as investors got more “risk off” in this troubled market. Then, after it disappointed the market with Q4 numbers at the end of January, its decline accelerated. In fact, AMZN stock lost roughly 8% in a single session.

However, the bears are reading too much into the short-term troubles.

For starters, the “disappointment” over earnings of $1 per share vs. estimates of $1.58 is not exactly an uncommon miss for the e-commerce king. Amazon has been investing heavily in growth over the last few years, leading to volatile bottom-line numbers and infrequent profitability. Also, while revenue missed expectations by a hair at $35.75 billion on forecasts of $35.9 billion, the figure marked yet another new record for AMZN.

And digging deeper, there’s a lot to like.

For example, despite already having massive scale, Amazon grew its top line 22% — and Wall Street expects roughly 20% sales growth in 2016 to boot, putting total revenue at over $150 billion.

That is simply stunning.

And beyond traditional e-commerce, its Prime memberships grew 51% over the last year; those memberships will continue to provide consistent cash flow going forward even as Amazon invests in growth. Also, efforts like the Fire TV streaming device and Prime Music continue to gain traction.

Along with these strong points, there is also heavy investment in Amazon Fresh — a same-day grocery delivery service that has enormous promise.

Although expectations were just a bit too high and the market has been hostile to momentum plays like Amazon in early 2016, investors should not worry about this downtrend persisting given that AMZN stock has plenty of bright spots.

Amazon Web Services Is the Crown Jewel

Perhaps most impressive, however, is the fast-growing Amazon Web Services arm of this company. Though investors have only gotten details on this cloud computing unit for about a year, the numbers we do have are too impressive to ignore.

Bears latched on to the fact that AMZN stock reported “only” 69% growth in this cloud segment — off 9 percentage points from the year before — but the expansion is still stunning. And when you consider the cloud computing arm will probably hit $10 billion in annual sales after being next to nothing a few years ago, that is a staggering feat worth celebrating.

It’s not just the top line, either. AWS saw operating income of $687 million in Q4 — a 161% increase — at a margin of 28.5%. This means that for a company that has struggled to turn a profit thanks to its focus on being the low-cost leader in retail, AMZN stock has finally found a profit center.

Even more impressive is that the cloud market continues to suffer price deflation as everyone from Amazon to Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) to Microsoft Corporation (NASDAQ:MSFT) race to lock up customers in the fast-growing cloud space. AMZN is making money, but forcing its competitors to post losses as they invest heavily to catch up in a race where Amazon Web Services is far ahead.

It’s difficult to see those numbers and not be amazed.

Look, if you want to chase declining retail giants like Wal-Mart Stores, Inc. (NYSE:WMT) on the premise of value, go right ahead. And if you want to chase fashionable, high-growth but deeply unprofitable tech names like big data play Splunk Inc (NASDAQ:SPLK), be my guest.

But for my money, this combination of retail dominance and high-tech growth makes AMZN stock the perfect investment in 2016 even after its declines. While some volatility is to be expected in this market, it seems almost impossible for Amazon.com to not wind up even more dominant in 2017 — and with its stock significantly higher as a result.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at [email protected] or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2016/02/amzn-stock-amazon-web-services-retail/.

©2019 InvestorPlace Media, LLC