Rare are the times that Amazon (NASDAQ:AMZN) stock isn’t “interesting,” but this month’s 11.36% decline, good enough for correction status and a drop that has the shares laboring 14.67% below the 52-week high, could be one of the rare, somewhat deep pullbacks in AMZN stock investors wait for.
On Wall Street, it’s often said that if you like a stock at $xx and then it declines, you’ve got to “love it” at the lower price. That can be foolhardy advice with any company, and there’s a good chance Amazon stock declines further over the near-term, but this is a growth story with over $25 billion in cash on hand and massive economic moats.
In other words, there’s a lot to like here even if the market gets it wrong for a little while.
As a high multiple growth stock in a cyclical sector, Amazon makes for a predictable victim when trade tensions escalate and fears of a recession grow. But as has been said many times in recent weeks, the Federal Reserve will do what it takes to keep a recession from happening in the U.S. For the skeptical, consumer data, while fluid, remains sturdy. Speaking of data, check out some of the latest from the Commerce Department on e-commerce, the primary driver of Amazon stock.
“Total retail sales for the second quarter of 2019 were estimated at $1,361.8 billion, an increase of 1.8 percent(±0.2%)from the first quarter of 2019,” according to the Commerce Department. “The second quarter 2019 e-commerce estimate increased 13.3 percent (±1.6%) from the second quarter of 2018 while total retail sales increased 3.2 percent(±0.5%) in the same period. E-commerce sales in the second quarter of 2019 accounted for 10.7 percent of total sales.”
Amazon’s New Acts
In the U.S., Amazon stock is often valued by analysts and investors as a play on cloud computing, e-commerce and the ownership of high-end grocery chain Whole Foods. The company is looking and has the financial resources to increase its footprint in streaming entertainment, among other potentially lucrative markets.
Of course, there are able competitors in nearly all of Amazon’s key markets in the U.S., meaning that as the company matures, investors will demand some ex-U.S. growth, something the company is already addressing. A recent deal gets Amazon into India, Asia’s third-largest economy and one of the world’s fastest-growing retail markets.
“Amazon.com NV Investment Holdings LLC agreed to buy 49% of Future Coupons Ltd., Future Retail said in a filing Thursday,” reports Bloomberg. “The deal gives Amazon the option to buy all or part of Future Coupons’ shareholding in Future Retail, though that won’t be exercisable until between three and 10 years.”
Over the near-term, this deal is of little consequence for Amazon stock, but the long-term view is much different. Due to a slew of able, native rivals, Amazon has scuffled in China, but India offers plenty of potential.
“India’s modern retail market will more than double to $188 billion by 2023 from $79 billion last year, according to consultant Technopak Advisors,” notes Bloomberg.
Whether it’s in the U.S., India or another market, consumers like a good deal. While Amazon isn’t viewed through the same lens as a Costco (NASDAQ:COST) or a Walmart (NYSE:WMT), shoppers think of Amazon as a place for good deals, a reputation that will likely be advantageous in international expansion.
“We believe Amazon’s brand has come to represent low prices, a wide selection, convenience, and superior customer service–a rare combination among retailers,” said Morningstar.
Bottom Line: AMZN Stock May Be a Good Deal
Amazon stock trades for 53x forward earnings and 3.46x sales, so no, Amazon stock isn’t cheap. It rarely, if ever, is. However, Amazon stocks continues warranting these lofty multiples for reasons including the aforementioned cash pile, management increasing, steadily increasing return on assets, return on equity, as well as rising gross and operating margins.
Analysts aren’t right all the time, but Amazon stock closed around $1,750 last Friday. The average analyst price target on the name is $2,261 with some targets in the $2,300 to $2,600 range. It seems Amazon stock may actually be a good deal here.
Todd Shriber does not own any of the aforementioned securities.