When investors look at Amazon (NASDAQ:AMZN), some see a richly valued stock with a slowing core e-commerce business. Because of this, there’s a group of investors out there who think Amazon stock is simply way overvalued and that slowing growth over the next few quarters will finally bring this stock back down to reality.
But, that’s not what I see when I look at Amazon stock. When I look at Amazon, I simply see too many growth levers to ignore.
Yes, AMZN is richly valued. It’s trading at over 90X trailing earnings. But, five years ago, Amazon was trading at over 1,000X trailing earnings. During that stretch, Amazon pushed into new growth areas like cloud, and revenues and profits powered way higher. That pushed Amazon stock higher, while allowing for substantial valuation compression.
This is the textbook definition of a stock growing into its valuation, and it will continue for the foreseeable future for Amazon.
Amazon stock simply has so many growth levers. At present, this is an e-commerce and cloud computing giant. But, there are rapidly growing digital advertising and offline retail businesses in the pipeline, so in two to five years, this will be an e-commerce, cloud computing, digital advertising, and offline retail giant.
Moreover, there is potential for huge growth from still developing logistics and pharmaceuticals business. Thus, in a five-year-plus window, this is a company that will turn into an e-commerce, cloud computing, digital advertising, offline retail, logistics, and pharmaceuticals giant.
That five-year transformation represents a lot of growth potential from today’s e-commerce and cloud business. Indeed, it represents too much growth to ignore. Ultimately, all this growth potential will power Amazon stock significantly higher in a multi-year window.
E-commerce Will Continue Growing
There are big concerns out there regarding a significant slowdown in Amazon’s e-commerce business. Indeed, this business is slowing rapidly. But, this slowdown should be largely expected.
After all, Amazon couldn’t hold 50% market share in the U.S. e-commerce market forever. Eventually, retail peers would increase their digital presence, and steal market share from Amazon. This is happening now. Thus, slowing growth isn’t a big concern nor all that surprising.
In the big picture, Amazon’s e-commerce business is still the leading platform in a surging digital commerce industry. E-commerce sales in the U.S. are still growing at a very robust 15% rate, and project to keep growing at a 10%-plus rate considering digital penetration is still below 10% of total retail sales.
So long as the e-commerce industry continues to benefit from secular tailwinds, Amazon’s e-retail business will grow at healthy 10%-plus rates.
Amazon Web Services Will Remain Red Hot
The one part of Amazon that isn’t cooling right now is the company’s cloud business, Amazon Web Services. AWS grew revenues by 46% last quarter, versus 42% in the year ago quarter, and are up 48% year-to-date, versus 42% growth year-to-date at the same time in 2017. Moreover, according to most market share reports, AWS has maintained its head-and-shoulders lead in the cloud market.
In the big picture, we are still in the early stages of a massive shift to cloud services, which is powered by increasing data utilization and storage needs. Data is only becoming more prominent and important globally, and as such, the entire cloud market is supported by powerful long term secular growth trends.
AWS is at the forefront of this cloud migration, implying that this business will remain red hot for a lot longer. It’s also a high margin business, so growth here should be doubly additive to profits.
Digital Advertising Is Big Growth & Big Margins
The most underrated part of Amazon’s business at the present moment is its digital advertising arm. A few years ago, Amazon didn’t have a digital advertising presence. Today, this business is operating at a $10 billion annualized revenue rate, and consistently doubling year-over-year (the digital ad business has grown by more than 120% year-over-year each quarter this year).
In the big picture, Amazon.com is one of the most visited websites in the world. Amazon also owns digital properties like Amazon Video and IMDb, in addition to owning the mega-popular Alexa voice assistant.
The sum of all those properties represents a ton of advertising real estate for Amazon to monetize. Only a fraction of that real estate is being monetized today, so Amazon’s ad business has runway to easily become a $20 billion or $30 billion-plus venture in several years. Also, this, too, is a high margin business, so big growth here will boost margins and profits.
Offline Retail Provides a Huge Opportunity
Amazon is making a serious push into offline retail, and this has huge long term implications. In late 2015, Amazon opened its first physical bookstore. In late 2016, Amazon launched its first cashier-less store. Then, in mid-2017, Amazon acquired Whole Foods. Now, Amazon is planning on opening 3,000 cashier-less AmazonGo stores by 2021, and wants to implement some of them in airports.
In the big picture, only 10% of U.S. retail sales happen in the digital format. Inevitably, that share will increase. But, the broader takeaway is that there still are and will always remain a significant portion of commerce transactions which happen in the physical channel.
Amazon wants a piece of that pie. If they do successfully cut themselves a piece of that pie, that could lead to billions of dollars in additional revenues and profits.
Logistics Is Big Potential With a Big Moat
Amazon has been gradually and quietly building out its own logistics network over the past few years, doing everything from creating a driver network to leasing airplanes. This business isn’t that large yet. In fact, it is still quite small. But, Amazon has the fulfillment center network, technological capabilities, and deep pockets to build out the most effective logistics network in America.
As such, it really is only a matter of time before Amazon’s logistics business becomes huge.
In the big picture, this business could be UPS (NYSE:UPS) or FedEx (NYSE:FDX) big one day. Those companies have market caps in the $50 billion to $100 billion range. As such, over the next several years, Amazon Logistics could add on an extra $75 billion in market value to Amazon stock.
Pharmaceuticals Offer Tremendous Growth Potential
Back in June, Amazon acquired online pharmacy start-up PillPack for an undisclosed amount. That was big news because PillPack has pharmacy licenses in all 50 states.
Pharmacy licenses were considered the biggest obstacle for Amazon in constructing an e-pharmacy business. Thus, with the PillPack acquisition, Amazon gave itself the necessary assets to begin a multi-year excursion into the massive U.S. pharmacy market.
In the big picture, Amazon will do to the pharmacy market what it did to the retail market, and ultimately create an exceptionally valuable e-pharmacy business.
The pharmacy market is a $300 billion market in the United States. Considering that more than 70% of consumers would be willing to purchase prescription drugs through Amazon, it seems highly likely than an Amazon e-pharmacy business inevitably controls the lion’s share of that $300 billion market, implying billions in revenue and profits.
Bottom Line on AMZN Stock
Amazon stock simply has too many growth levers to ignore. In the big picture, those growth levers will power tremendous earnings growth, the likes of which will keep Amazon stock on a long term uptrend for a lot longer.
As of this writing, Luke Lango was long AMZN.
