Although e-commerce behemoth Amazon (NASDAQ:AMZN) is among the elite disruptors in technology, its stock has turned in a performance this year unbecoming of the underlying organization. While shares are up in double-digit territory for the year so far, it’s a relatively pedestrian return. Still, that might change due to one key demographic: the millennials.
Before I get into the specifics, we should discuss the broader catalyst for the stock price. As expected, both Black Friday and Cyber Monday saw record-breaking sales. While the revenue tally represented a tailwind for retail in general, the numbers were definitely more favorable toward Amazon.
On Black Friday, online sales hit a record high of $4.2 billion. Cyber Monday generated sales of $7.4 billion. A major reason for the combined successes was increased smartphone and smart device adoption. From a sentiment point of view, this is a significant development because it proves that consumers are getting over their fear of using mobile platforms to convey sensitive financial information.
Although the stock price has stubbornly ignored the positive news, this is a net positive for shares longer term. In the third calendar quarter of this year, e-commerce has accounted for over 11% of all retail sales. Since late 1999, this trend has always ticked higher in every quarter except during recessions.
More critically, Amazon is increasingly capturing a greater share of the e-commerce pie. According to InvestorPlace’s Chris Markoch, Amazon captured half of all U.S. online sales last year. The next closest competitor, eBay (NASDAQ:EBAY), didn’t come close at all with 6.6% share.
So, why is the stock price printing red ink?
Millennials Will Save Amazon
In my view, the negatively unintuitive trading for Amazon has a clear answer: unfavorable fiscal comparisons. Based on forward price-to-earnings ratios, the stock looks overvalued at nearly 56 times. On the other hand, similar names like Alibaba (NYSE:BABA) or JD.Com (NASDAQ:JD) have far lower earnings multiples.
However, these numbers only mean something with the proper context. With Amazon, we’re talking about a company which has made several key acquisitions. Logically, these buyouts hurt the bottom line in the nearer term. But in the long run, they should make Amazon an extremely relevant player.
And with so many businesses to explore, it’s difficult to pick just one to support a bullish argument. But in the here and now, I’d like to draw readers’ attention to a not-often discussed catalyst for Amazon: toy sales.
Since roughly the middle of this decade, revenues from toy, hobby and game stores have steadily declined. That’s not surprising given the aforementioned push toward e-commerce. But one winner in this malaise is Amazon.
Although the company didn’t disclose specifics, management mentioned that the Thanksgiving to Cyber Monday sales-fest especially benefitted toys. In the years ahead, I firmly believe that Amazon will continuously disrupt this market, even if it didn’t intend to.
You see, it’s all in the numbers. Right now, the youngest millennials are approaching their mid-twenties. Thus, everyone in this group are potential baby-makers.
Also consider that college tuition didn’t reach absurd levels universally until the late 2000’s. Therefore, millennials that are today between approximately 30 years to 40 years old should have the greatest purchasing power. As young Americans have delayed family building, it’s not unreasonable to expect a surge in toy sales over the next few years, which positively affects Amazon.
More Youngins Coming
Here’s some more food for thought: We haven’t yet reached “peak” millennial.
Those born in the 1980’s are now in their 30’s. That leaves the bulk of millennials — born in the 1990’s — to start seeing substantial increases in their income. And as finances stabilize, the incentive to start families goes up.
We’re not going to be done with this millennial surge for Amazon, not for a while.
Therefore, I don’t think it’s the time to give up on Amazon. Although the 1990’s-era millennials will bear exorbitant education costs, there are so many of them. Collectively, their spending power is enormous. While literally a small deal, the toy factor is huge fiscally for the e-commerce giant.
As I briefly alluded to earlier, I’m only talking about one aspect of Amazon. When I bring in the other attributes — cloud computing, streaming, in-house courier services — it becomes absurd. Amazon isn’t overvalued. Instead, it’s undergoing a healthy correction, one that you can advantage if you want.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
