Amazon.com, Inc. (NASDAQ:AMZN) stock has been in a continued decline ever since the e-commerce giant reported a huge bottom-line miss in its second-quarter earnings results last month. But, those who sold AMZN stock, which I expect to rise to $1,200 by year’s end, may soon regret it.
AMZN stock closed Friday at $945.26, down 0.75% and losing 1.4% for the week, while losing 9.1% over the past thirty days. If you’ve bought and held AMZN stock since it reached its all-time high of $1,083.31 just prior to the Q2 results, you’re down about 11%.
But, here’s the thing: Not spending money is what has hurt brick-and-mortar retailers such as Macy’s Inc (NYSE:M), Sears Holdings Corp (NASDAQ:SHLD) and J C Penney Company Inc (NYSE:JCP). In an attempt to boost their bottom lines, they haven’t been able to shutter their doors fast enough. But, how has that been working for them?
Amazon’s spending is the reason it continues to take market share. It’s only a matter of time before it delivers the profits Wall Street so desperately craves. Until that day, it would be a mistake to part with AMZN stock, which I expect to reach $1,200 by year’s end.
Spending Money Where It Matters
CEO Jeff Bezos, who has made many AMZN stock investors rich over the past decade, cares little about what Wall Street thinks. The company’s Q3 profit guidance of negative $400 million-$376 million, versus consensus of $950 million, suggests more spending to come. But, that level of spending isn’t unusual for AMZN, which tends to ramp up as it prepares for the holiday shopping season.
Unlike traditional brick-and-mortar names that are entrenched in antiquated ways of doing business, Bezos is focused on building the company’s ecosystem, while providing sustainable and predictable revenue growth. AMZN is focused on remaining an industry leader by capitalizing on areas such as Big Data, artificial intelligence and machine learning.
To that end, Bezos doesn’t mind making necessary investments to ensure his company’s long-term success. Amazon’s $13.7 billion blockbuster deal for Whole Foods Market, Inc. (NASDAQ:WFM), which gives AMZN a strong presence in the $800 billion grocery business in the U.S., is the most recent example.
Bezos has experimented with brick-and-mortar stores for several years, namely with Amazon Fresh and Amazon Go. Buying Whole Foods should pay off in the long term, given that Whole Foods has higher margins than Amazon’s retail business (5% vs. 3%). Plus, the 460 Whole Foods locations are in prime areas that Amazon can use to to enhance its fulfillment initiatives.
Amazon isn’t stopping there, either.
Last week, Reuters reported that Amazon will open a distribution center in Bristol, located in south west England. This is part of the company’s plan to expand its footprint in the UK, where Amazon has already spent half a billion dollars, tripling its investments in the country. This makes sense, given that Britain has grown to become Amazon’s third-largest market outside North America, where 2016 revenue rose 20% to $9.5 billion.
From my vantage point, it’s more important to focus on what Amazon is spending money on, not just the fact that it’s spending.
Bottom Line for AMZN Stock
Despite the decade-long dominance of AMZN stock — up over 1,000% since 2007 — Amazon’s business model has kept would-be investors at bay, particularly those who focus on valuation metrics.
But, purely from a risk-versus-reward perspective, seeing as most retailers are dying, combined with the rate at which brands are selling their wares on Amazon, the company’s spending habits have paid off for whose who have held Amazon stock over the past decade.
Just imagine what AMZN stock could do once Bezos decides to focus on profits.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
