If you step back from Amazon.com Inc (NASDAQ:AMZN) and ignore the P/E ratio of AMZN stock and other factors, there’s one really amazing aspect of the company. Twenty-three years after its founding, with 2017 revenue likely to come in around $173 billion, Amazon still is growing sales 27% both this year and even next year, according to projections from Amazon stock analysts.
Amazon is almost certain to be in the top of next year’s Fortune 500; it grows like some new upstart tech company.
It’s that growth potential that keeps me bullish on Amazon stock, even with a high valuation and numbers that are about 10% off all-time highs. It’s true that AMZN looks ridiculously valued based on its P/E ratio, but the company isn’t focused on earnings. And looking at some of the growth drivers going forward for Amazon, it’s clear why.
Advertising, AWS, and Amazon Stock
For all the hype about Amazon’s acquisition of Whole Foods Market, I actually don’t see WFM as a major driver for AMZN stock. It’s a smart deal, and it does open some options for Amazon in terms of expanding sales of the Echo, the company’s “smart speaker” product, and the use of Amazon lockers, locations where buyers can pick up items conveniently. But the nearly $14 billion purchase price is less than 3% of Amazon’s current market capitalization. Even if it were a phenomenal deal, with Whole Foods worth double what Amazon paid, it would only add about 2.8% in value to Amazon stock.
But Amazon has other, potentially more interesting, revenue drivers. Amazon Web Services does get a fair amount of coverage, but it still looks underrated. While Microsoft Corporation (NASDAQ:MSFT) continues to gain off optimism toward its Azure platform, Amazon Web Services remains the market leader. AWS revenue increased 42% in the first half of 2017, with operating margins holding pretty much steady. The business alone generated $1.8 billion in operating profit, nearly double the rest of the business in North America.
Meanwhile, Amazon also has a major opportunity in advertising. As The Motley Fool pointed out, recent estimates suggest that Amazon already drives more advertising revenue than Twitter Inc (NYSE:TWTR). With ad load still relatively low, and room to raise rates closer to those of Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL), Amazon has potential for huge growth — at higher margins than the retail business.
The bull case for Amazon stock isn’t just about the company taking market share from old-line brick-and-mortar retailers. There are multiple businesses where Amazon can, and likely will, dominate for the coming years.
Is AMZN Stock Too Expensive Anyway?
At 122x forward earnings, some skeptics argue that growth already is priced into Amazon stock, but the fact remains that Amazon isn’t focused on profits; it’s focused on growth. And that makes sense.
In AWS, upfront costs result in years, if not decades, of high-margin, recurring revenue. Initial price cuts at Whole Foods likely mean that business won’t contribute much in the way of upfront profits. But shedding the company’s “Whole Paycheck” image and benefiting from Amazon’s impressive supply chain can recapture lost customers. That too will pay off down the line.
Amazon has been slow in rolling out advertising options, because it didn’t want to upend the core user experience. Benefits will be coming down the line as well.
There are billion-dollar opportunities across Amazon’s portfolio, but for now the company largely is reinvesting those profits in new opportunities which, once again, makes sense. This is a $170 billion-plus company that’s growing 27% a year. It’s a combination that is basically unprecedented.
That growth, and Amazon’s scale, allowed it to buy Whole Foods, take an apparent lead in smart speakers, to turn AWS from something close to an engineer’s whim to a business likely worth $150 billion or more.
Anyone criticizing that strategy, or questioning the valuation, should remember one simple fact: For Amazon, and for Amazon stock, that strategy obviously has worked so far.
As of this writing, Vince Martin has no positions in any securities mentioned.
