It has been a disappointing year for those of us with Amazon (NASDAQ:AMZN) in our portfolios. The e-commerce giant has underperformed the market in 2019 as CEO Jeff Bezos and his team shelled out big bucks in order to make one-day shipping happen.
This isn’t the first time investors got skittish about Amazon’s heavy spending and it likely won’t be the last, but it makes for an excellent entry point— especially in the current market.
Amazon’s Shipping Gamble Weighs on Prices
Bezos’ one-day shipping aspirations come at a price, and a hefty one at that. The firm is slated to spend $1.5 billion during Q4 in order to expand one-day shipping availability. Some are questioning whether it will be worth it, though. As Amazon Prime members enjoy unlimited free shipping, costs could rise even further as huge numbers of small packages are shipped across the U.S. in just a day.
As a result of Amazon’s spending spree, the firm missed expectations in its Q3 results. Management’s guidance for Q4 suggests a similar outcome for both the firm’s quarterly and full-year results.
Is It Worth the Spend?
Investors have punished Amazon for its profit losses, but Bezos and his team say the shift to one-day shipping is worth the expense. Amazon’s one-day shipping initiatives boosted sales and cash flow by 24%, and some expect that figure to continue rising as the firm expands the number of products available to ship in just 24 hours.
The one-day shipping initiative likely contributed to Amazon’s record-breaking Black Friday results as well. The firm said it had its “best-ever Black Friday in the company’s history.” Cyber Monday also went well for Amazon. A press release claimed it had, “sold more items on Cyber Monday than any other 24-hour period in the company’s history.”
It remains to be seen exactly how much one-day shipping will cost Amazon and whether that investment will pay off. However, the majority of analysts believe it will. Of the 49 analysts covering the stock, only two have a “hold” rating while the other 47 have an “overweight” or “buy” rating. Can 96% of Wall Street’s finest be wrong? Sure, but it’s unlikely.
Unparalleled Business Model
Amazon has built a business that is unparalleled in the retail sector, which should work to the firm’s advantage over the longer-term. In a research note, Citi Research analyst Jason Bazinet pointed out that although the cost of goods sold at Amazon is disappointing now, the firm is positioning itself for robust growth in the future.
“We believe Amazon is intentionally selling goods to Consumers at a loss,” Bazinet said. “But, it is leveraging dual-purpose infrastructure (servers, fulfillment centers, web traffic) to profitably sell services to Enterprises.”
He went on to say competing retailers will likely struggle to replicate Amazon’s business model, which gives the firm a distinct advantage moving forward.
More Than Online Sales
Investors should keep in mind that Amazon is more than e-commerce. Sure, Amazon’s retail business is still paying the bills, but the firm is working to diversify. Amazon Web Services has been one way the company is looking to grow into new spaces, but the firm is also making bets on healthcare.
Healthcare has become a battlefield for big-name tech firms as it offers a ton of potential growth. As the population ages and people look for ways to reduce the cost of healthcare, tech firms like Amazon are hoping to fill that gap. Amazon’s most recent advance in the healthcare space was the purchase of Transcribe Medical earlier this month. The firm uses voice-to-text technology to transcribe conversations and store them in electronic medical records.
While Amazon’s healthcare bets have yet to take off, the firm’s focus on diversifying is a good thing for investors. The more successful businesses under the Amazon umbrella, the better prepared the company will be in the event of an economic downturn.
The Bottom Line
Amazon is a solid long-term pick for investors who can wait for the firm’s bets to pay off. Uncertainty about spending has created a great entry point to add Amazon to your portfolio if you’re willing to wait for the shipping investments to start paying dividends.
As of this writing, Laura Hoy was long AMZN.
