Amazon (NASDAQ:AMZN) Chief Executive Jeff Bezos became the world’s richest man by living by the philosophy that you have to spend money to make money. Sometimes holders of Amazon stock enjoyed the ride, other times like this year, not so much.
Shares of the Seattle-based company have gained 16 percent this year, underperforming the broader market as represented by the S&P 500, which rose 24 percent in 2019.
Rivals in Amazon’s diverse lines of businesses such as Walmart (NYSE:WMT) (eCommerce), Microsoft (NASDAQ:MSFT)(cloud computing), and Walt Disney (NYSE:DIS) (video content) had better years than AMZN as well, rising 26 percent, 35 percent, and 47 percent respectively.
Investors Are Punishing Amazon Stock
Amazon also has lagged its historical performance as investors punished the stock amidst concerns about a slowdown in growth in both its core eCommerce and AWS cloud businesses. The shares gained 117 percent in 2015, 73 percent in 2016, and 51 percent in 2018. They currently trade at a roughly 25 percent discount to the median 12-month price target of $2,180.
Let me explain why the stock is a buy at these levels.
The company’s fourth-quarter revenue guidance was $86.5 billion, well under analysts’ expectations of $87.4 billion, indicating that the holiday season might not be so jolly.
According to the National Retail Federation, holiday sales will rise between 3.8 percent and 4.2 percent, above the five-year average of 3.7 percent. Even so, the trade group sounded a cautionary note, noting that consumers were worried about the growing political divide and trade wars.
Conservative Holiday Guidance
AMZN’s forecast may be conservative. The company routinely breaks holiday sales records. I will be stunned if the 2019 holiday season doesn’t follow that same path. Anything less would be viewed as a disappointment by investors who would send AMZN stock into a nosedive.
According to Synergy Research Group, AWS controls 40 percent of the public cloud market, well above rivals such as Microsoft (NASDAQ:MSFT), Alphabet’s (NASDAQ:GOOG) Google and Alibaba (NASDAQ:BABA)which each have less than 20 percent share. AWS’ leadership has been eroding for a while and MSFT surprise win of the $10 billion Jedi Pentagon cloud contract doesn’t help matters.
Spending on content for Amazon Prime Video is expected to top $7 billion in 2019, less than half of the $15 billion that Netflix (NASDAQ:NFLX) reportedly shelled out for TV shows and movies. The streaming wars are heating up thanks to the recent launch of Disney + and Apple TV+ along with next year’s debut of HBO Max.
The odds are strong that Amazon will spend billions more on Prime Video in 2020 though whether that’s money well spent remains to be seen.
As of this writing, the author did not hold a position in any of the aforementioned securities.