Amazon’s Pay Raise Is Yet Another Reason to Own Amazon Stock

Amazon stock - Amazon’s Pay Raise Is Yet Another Reason to Own Amazon Stock

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When it comes to technology giant Amazon (NASDAQ:AMZN), it seems Mr. Market gets a new reason to buy the stock every year. At first, you bought Amazon stock because of its pioneering efforts in the burgeoning e-commerce space. That was at the start of the decade. Then, you bought Amazon stock because the upstart e-commerce business became the one of the ten largest retail operations in the world. That was around 2015.

After that, you bought Amazon stock because the company’s nascent cloud business was turning into a global leader in a huge secular growth market. That transition happened in 2016-17. Now, in 2018, the reason to buy Amazon stock is that the company is expanding its addressable market to include groceries, digital advertising, pharmaceuticals, logistics, offline retail, smart home and more.

In other words, there are a million and one reasons to own Amazon stock. And the only reason not to own Amazon stock (valuation), has been a reason not to own the stock for the past $2,000. In other words, it is an illegitimate reason. This company has proven, time and time again, that it has an unprecedented ability to grow into its valuation through both dominating existing markets, and expanding into new ones.

Despite investors not needing another reason to buy Amazon stock, management recently gave them one anyway. Amazon announced it was raising the minimum wage across the entire company to $15 per hour — more than double the federal minimum wage of $7.25 per hour.

This isn’t a game-changer. Amazon stock won’t fly higher as a result of this pay raise. But it is yet another positive development in the Amazon narrative. Importantly, it delays and mitigates antitrust risks, and that should allow Amazon stock to continue to head higher without meaningful turbulence.

The Pay Raise Mitigates Risk

One of Amazon’s biggest risks is government intervention.

Specifically, U.S. President Donald Trump has sounded the antitrust horn multiple times on Amazon. Nothing has happened — yet. But Amazon is only getting bigger. The bigger Amazon gets, the higher the likelihood the government steps in to break up Amazon and/or hinder the company’s growth in order to promote fair competition.

Thus, as Amazon grows, management needs to do everything in its power to stay ahead of potential antitrust action. That is exactly what this pay raise does.

In recent memory, antitrust action has predominantly been used when anti-competitive practices hurt the consumer. Amazon has consistently avoided antitrust action because the company has long been on the side of the consumer. After all, Amazon retail rose to power by being the cheapest and most convenient option in the market.

Hiking its minimum wage to $15 per hour makes Amazon more consumer friendly than ever. Amazon can only do this because it is so big and makes so much money that it can absorb higher wages. Thus, in the eyes of the public, and in the eyes of regulators, Amazon’s size is being used to the benefit of the consumer.

From this perspective, Amazon’s big pay raise is a positive development. If nothing else, it allows the company to yet again sidestep antitrust and regulation risks. With one less major risk to worry about in the near-term, Amazon stock looks as strong as ever.

Amazon Stock Remains a Must-Own

In the big picture, Amazon stock remains one of the market’s must-own stocks.

The big reason some investors shy away from Amazon is because of valuation. After all, the stock trades at a triple-digit forward earnings multiple — and that big multiple makes it subject to a big drop if the bull market ends.

But such an approach is the wrong way to look at risk. For long-term investors, risk shouldn’t be perceived as potential for downside. Rather, risk should be perceived as potential for permanent loss of capital. In this sense, Amazon isn’t all that risky.

It is likely that at some point in the next two to three years, the bull market hits a major snag and drops in a big way. When it does, Amazon stock will drop with it. But it is also equally likely that, at some point in the next five to ten years, Amazon will dominate the global online retail market, offline retail market, cloud services market, digital advertising market, logistics market, pharmaceuticals market and more.

The combined TAM of those businesses is in the trillions of dollars, so it also likely that this an $800-$900 billion revenue business within five to ten years. Margins in retail are improving and the margins in digital advertising and cloud are huge, so Amazon could be looking at 10% operating margins at scale. That would translate to roughly $85 billion in operating profits. Taking out 10% for taxes, we arrive at just under $77 billion in net profits in 2025.

At that point, investors can forget the triple-digit multiple. Just give Amazon a Google (NASDAQ:GOOG) multiple of 25. Even at that relatively stable valuation, Amazon would still be worth nearly $2 trillion.

Overall, then, I don’t see Amazon stock as all that risky. It is risky in the sense that AMZN stock could have a major correction within the next two to three years. But it isn’t risky in the sense that permanent loss of capital is unlikely. The most likely path forward is a $2 trillion valuation within the next decade.

Bottom Line on AMZN Stock

A minimum wage hike at Amazon isn’t a game-changer. But it is yet another positive development in the Amazon narrative. So long as this narrative continues to gain momentum, Amazon stock is a must own for the long run.

As of this writing, Luke Lango was long AMZN and GOOG. 

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