We’re headed into the final month of 2016 and only one stock in the S&P 500 trades above $1,000 — and it’s not Amazon.com, Inc. (NASDAQ:AMZN). That distinction goes to Priceline Group Inc (NASDAQ:PCLN), which is well on its way to $2,000.
Investors are fascinated by the subject of Amazon stock hitting quadruple digits. Search the words “Amazon.com, stock, $1,000” and you get hundreds of thousands of results. It’s as if hitting $1,000 confirms Jeff Bezos’ grand plan while at $900, the Amazon stock price and AMZN itself are just another company on the S&P 500.
Will it or won’t hit $1,000?
Well, to get there — AMZN stock closed Nov. 25 trading at $780.37 — Amazon stock must rise 28% over the next 13 months. Seems easy enough. Over the past decade, Amazon.com has achieved 28% or more annual gains on six occasions — 2007, 2009, 2010, 2012, and 2015 — with the most recent an index-blowing 118%. Not to mention, Amazon stock over the past decade has averaged an annualized total return of 33.8%, about five times the return of the index.
So, yeah, it’s possible. Very possible. But that doesn’t mean it will happen. Here’s why.
Why Amazon.Com Could Hit $1,000 in 2017
It’s a loss leader to bring more shoppers. Currently, approximately 100 million people globally subscribe to Amazon Prime. At $99 per year, that’s $9.9 billion in revenue. Nice.
Except with that $99 annual subscription, you get video and music streaming included as part of the deal. Those two services cost approximately $240 when bought separately through Spotify or Netflix, Inc. (NASDAQ:NFLX).
You don’t have to be a rocket scientist to know that when you add in free two-day and in some cases, same-day delivery, the customer is getting a bargain at twice the price.
Amazon.com does this for the same reason your local grocery store puts milk on sale for $1.50 a gallon — to get you in the store where you’ll buy more. Note, I didn’t say if you buy more; the data overwhelmingly shows you will.
In the case of Amazon Prime, RBC Capital Markets did an online survey of Amazon Prime customers and their spending habits after becoming members. A whopping 76% said they were spending more compared to when they first became members.
Essentially, Amazon is capturing retail market share one Prime customer at a time. In the meantime, its Amazon Web Services business is a license to print money generating close to a billion dollars in 2016 operating income which is converted to free cash flow which goes to pay for further Amazon Prime penetration on a global basis.
Forget about quarterly misses. The big picture is huge.
Why Amazon.com Won’t Hit $1,000 in 2017
For me, it has got less to do with Amazon itself, and more to do with the state of the stock markets in 2017.
While things seem rosy as we transition from a Democrat-led Barack Obama administration to that of a Republican presidency under Donald Trump — S&P 500 up 3.3% since Nov. 8 election through Nov. 25 — history shows that stock markets do worse under Republican presidents.
S&P Capital IQ has found that since 1945, Democratic presidents have seen average annual S&P 500 returns of 9.7%, 300 basis points better than Republican presidents. Worse still, only two presidents had negative returns in their tenures, and both (Nixon, George W. Bush) were Republicans.
So, if 2017 is a going to be a down year, it’s more likely to happen under a Republican presidency. At least, that’s what history tells us. However, it’s also important to note that Gerald Ford, a Republican, was in office when the index had its best gains.
In the end, a president’s party affiliation has little to do with the ultimate success or failure of the stock markets. What kills markets faster than any superstition is real economic uncertainty. The markets went up after Trump’s victory because the election was over and people could get on with their lives.
Once Trump takes office in January, it will become clearer where the U.S. economy is headed in the next four years. If investors don’t like what they see or hear from a Republican-dominated federal government, a correction will undoubtedly ensue — perhaps as much as 10%.
There have been 10 S&P 500 corrections of 5% or more since 2008, two of which have come in the past 24 months (-12.4% and -13.3%). The markets are sending us warning signs. Whether we choose to listen is another question altogether.
Should a big correction happen, it’s possible that Amazon stock will hit $1,000 anyway, but certainly it diminishes the likelihood.
Bottom Line for AMZN Stock
One can never know the ultimate outcome of the markets from day-to-day, month-to-month, even year-to-year, but over the long haul, they’ve proven to move in an upward trajectory.
If you’re buying Amazon stock hoping it will hit $1,000 in 2017, it’s highly likely you’ll be disappointed.
If you’re buying Amazon for the next decade or more, it’s highly likely you’ll be delighted.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.