Amazon Stock Will Thrive By (Almost) Defying Numerical Assumptions

AMZN stock's growth levels are typically reserved for startups, not the largest companies in the world

The year 2019 will probably go down as one that holders of Amazon (NASDAQ:AMZN) stock would like to forget. The Seattle-based tech giant has seen growth in the equity come to a standstill. Slowing profit growth and government scrutiny have weighed on the equity. The current Amazon stock price of about $1,740 per share has not moved significantly over the last year.

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Still, investors may have good reason to look at AMZN stock again. Due mostly to non-retail initiatives, profits could see a dramatic recovery.

More importantly, Amazon may rise again due not only to business success but its ability to defy assumptions about numbers themselves.

AMZN Stock Has Lost Its Luster

Amazon has seen its share of struggles this year. As InvestorPlace’s Ian Bezek points out, many question Amazon’s move into the low-growth grocery business with Whole Foods as well as a questionable challenge to Netflix (NASDAQ:NFLX) and other streaming companies.

Moreover, competitive responses by the likes of Walmart (NYSE:WMT), Target (NYSE:TGT) and Costco (NASDAQ:COST) have made it clear that Amazon will not dominate retail to the degree some had feared. Additionally, an antitrust investigation of Amazon and other large tech outfits has also added to the uncertainty.

However, the firm’s previous strategic missteps have not caused long-term harm to Amazon stock. Whole Foods and movie streaming may do little more than incentivize Prime memberships. Still, I do not see these weighing on AMZN stock for very long.

Despite the company’s start in retail, Amazon has become a conglomerate that derives the majority of its profits from cloud computing. Due in large part to this cloud business, Wall Street sees a significant recovery in the profit growth of AMZN stock.

How Fast Can Amazon Grow Profits?

For a company that had more than doubled profits in past years, the current earnings prediction of 16.7% seems paltry. However, in the future, analysts forecast an earnings increase of 41.2% in fiscal 2020. They also believe profit growth will average 83% per year over the next five years.

Such growth seems mind-boggling for a firm with an $860 billion market cap. It also reminds me of a study by the Federal Reserve Bank of Dallas. In that study, researchers deal with the conundrum of comparing growth in a large state like Texas with much smaller states. Texas will tend to have the largest absolute increases due to a large size. However, smaller states may grow faster on a percentage basis because of their smaller base.

Likewise, with stocks, investors usually assume that percentage increases will drop as an entity grows. Other mega tech companies such as Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) or Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) continue to put up strong growth numbers.

However, their rate of profit increase does not come close to that of AMZN stock. Despite its large size, Wall Street believes Amazon will see the type of percentage profit increases usually associated with successful startups. They foresee an 83% annual earnings increase prediction for the next five years. That comes in lower than the 108.6% average of the last five years. Still, that represents a huge improvement over 2019 numbers. It also manages to push the limits of long-held assumptions about percentage increases.

In fairness, a phenomenon unique to Amazon drives these massive increases. The earnings increases do not come from retail, which remains Amazon’s traditional, low-margin business. The profit growth comes mostly from the cloud, which continues to enjoy phenomenal growth. Thanks to cloud-driven profit increases, the growth story in AMZN stock may continue for some time to come.

My Final Thoughts on Amazon Stock

The company may resume the price growth in AMZN stock by calling into question not just rules of business, but that of numbers themselves. The company has struggled in recent months as profit growth has slowed.

However, analysts see a resumption of earnings increases of just above 80% on average over the next few years. Investors typically see that level of growth from a successful startup, not from one of the largest companies in the world. This has happened as the company derives most of its earnings not from retail, but its cloud business.

To be sure, Amazon has not actually defied any laws of numbers. Still, it has found a way to push assumptions to the limit. This could make AMZN stock not only a buy but also the largest growth equity in history.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/amzn-stock-thrive-defying-assumptions/.

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