Even after returning 71% this year, Amazon.com (NASDAQ:AMZN) has given few reasons for bullish investors to doubt AMZN stock will continue going up.
If conservative valuations still don’t matter, what is stopping Amazon.com stock from trading at $3,000, giving another 50% in upside? At a PEG ratio (P/E to Growth) of nearly 80 times, the stock is still cheaper than Chinese search giant Baidu, Inc. (NASDAQ:BIDU). Alibaba Group Holdings Limited (NYSE:BABA), a China-based Amazon.com comparable, trades at a PEG of 11x.
Investors may easily cherry-pick financial valuation ratios that cast an expensive online retailer favorably. Yet Amazon.com is on the cusp of holding a $1 trillion market capitalization, just as Apple Inc. (NASDAQ: AAPL) has.
Still, the online retailer deserves to trade where it is. It succeeds in every business it enters. For example, when customers shifted their shopping from malls to the online site, sales in clothing, computers, and other popular goods soared. Best Buy Co., Inc. (NYSE:BBY) was famously considered the physical store to check out tech goods before buying them on Amazon.
Best Buy managed to survive by getting out of Amazon.com’s way and profiting through a focus on smartphones, fitness devices, and home security. The online retailer grew by offering all-inclusive services to its customer. With Amazon Prime memberships, customers enjoyed music, streaming video, free shipping, and more.
Grocery Business Thriving
Amazon.com’s Prime membership model has similarities to that of Costco Wholesale Corporation (NASDAQ:COST). But that is not how Amazon.com could potentially disrupt Costco. Its acquisition of Whole Foods could have hurt Costco. For now, the two grocery giants are thriving in harmony. Amazon.com did not need to lower the price of that many goods, which is probably a relief to Costco’s management.
What Amazon.com is doing is opening cashier-less grocery stores. It opened a store in Chicago on Sept. 17. What’s its appeal to customers? There are no checkout lines, potentially sparing customers from idle time in line-ups. Customers simply enter the store and open the Amazon.com Go app. When they pick up their items and leave, items are automatically charged to their Amazon account.
Growth Is With AWS
Still, groceries are not a likely area of growth for Amazon to justify AMZN stock price. For now, AWS — its cloud services business — is still the biggest revenue generator for the firm. In Q2/2018, AWS had its third-consecutive quarter of accelerating growth, adding 49%. The company signed on so many new contracts and new customers that it faced a backlog during the quarter. Business accelerated because Amazon added 800 new services and features in 2018.
The AWS Database Migration Service tool just one additional offering that drove its customers to migrate over 80,000 databases. The value of AWS does not stop there. Machine learning, Internet of Things, serverless computing, analytics and artificial intelligence are all areas of growth for AWS. Needless to say, security and performance are also expected of AWS and keeps Amazon’s customers from leaving.
Risk From the Redmond Neighbor
Companies like Microsoft Corporation (NASDAQ:MSFT) are pushing Azure and enjoying growth of 90%. Still, Redmond, Washington-based Microsoft has a smaller revenue base compared to Amazon’s massive AWS business.
In the grocery space, Amazon’s Whole Foods integration could still have write-downs, higher operating costs, or unexpected underperformance as it adjusts product pricing.
Takeaway on AMZN Stock
So far, what’s fueling AMZN stock appreciation is a company competing effectively in all of its markets. In the B2C market, Amazon continues to grab market share as consumers spend more online. In the membership subscription space, Amazon is growing at a 50% clip. From there, the company may upsell additional services and goods, boosting profitability and revenue.
One final note: I’d be remiss in this review of AMZN stock without considering Alexa? The company is spending plenty on R&D to get a voice-activated assistant to complete shopping tasks. As the price for Alexa devices falls, more and more people will buy it. Eventually, this area of the market will become a multi-billion revenue generator for Amazon.
The author does not hold shares in any of the companies mentioned.