Amazon.com, Inc. (NASDAQ:AMZN) took a break from its meteoric, exponential rise just after the company reported incredibly strong quarterly results. The online retailer exceeded all analyst estimates as its customers flocked to the site during the holiday season.
Even scarier for anyone betting against Amazon.com is the company’s strength outside of retailing. Alexa is still in its infancy in the Home Assistant space while Amazon Web Services (AWS) is critical to the company’s operating income.
AMZN Stock’s Q4 Results Shine
Amazon reported $60 billion in revenue during the holiday quarter, up by an astounding 36 percent from last year. North America counted for 42 percent of the revenue but international sales are inching higher at 29 percent of the total. Operating income from AWS totaled over $1 billion out of the $2.1 billion total.
Alibaba Group Holding Limited (NYSE:BABA) may only aspire to have income this big from its Cloud services. The Chinese online retailing giant is modeling its business after AMZN. The difference is that Alibaba’s Cloud services are still a small part of its total business.
Alibaba May Trail AMZN’s Stock Performance
Just as BABA stock fell in the recent market selloff, AMZN stock fell less. Amazon even has higher price-multiples, which would suggest a bigger correction in its valuation. Yet bears dare not bet against AMZN — every market it enters, it gains market share and destroys the incumbents.
The company acquired Whole Foods. In the fourth quarter, Amazon managed a high volume of sales for the grocery unit. Whole Foods made $4.5 billion in revenue in the last quarter, beating its own targets. Lowering the prices of good at the store proved strategically valuable. Amazon launched Whole Foods products on its own dot com website. It plans to offer a Whole Foods rewards program to its Amazon.com Prime members.
When Amazon first announced the Whole Foods buyout, Costco Wholesale Corporation (NASDAQ:COST) and Walmart Inc (NYSE:WMT) fell sharply on the stock market. It, along with other grocery retailers, eventually rebounded but the threat is very real.
The online giant may cross-sell groceries to its massive customer base and Prime members. As a one-stop shop for such things as books, electronics, food, movies, music, and more, competitors depending mostly on physical stores will have a tough time competing with online shoppers. It’s very convenient to shop for everything online instead of going physically to grocery stores to shop.
AWS Is Central To AMZN Stock Profits
Alongside all the moving parts within Amazon is AWS. Operating margins rose by 100 basis points in the fourth quarter. Revenue is now tracking a $20 billion quarterly run rate. The company added new features and services that drove demand globally. Not only are customers signing up for AWS services but Amazon.com’s own Prime Video, Now, and AmazonFresh all benefit from the technical advances for AWS.
After Amazon raised prices for AWS in December, it added positively to profit margin. Investors should note that the capital costs typically happen in the current first quarter.
So the next quarterly result will likely show weaker operating profitability from AWS. Still, investments in AWS and services like Alexa will weigh on near-term results but will add meaningfully to the company’s growth in the long-term.
AMZN Stock Valuation
While Wall Street has an average price target of $1,631 (based on 44 targets), finbox.io models suggest a roughly 15 percent upside, or $1,600 fair value. AMZN stock topped $1,498 earlier this month.
When the market correction ends soon, Amazon may take another run at the $1,500 level. When sales are up nearly 40 percent per quarter and earnings per share will grow around 30 percent in the next five years, investing in Amazon makes plenty of sense.
Disclosure: The author does not own shares in any of the companies mentioned. He may buy BABA or COST stock within the next 72 hours.
