From a longer-term perspective, it’s not hard to hold a bullish opinion on Amazon (NASDAQ:AMZN). One of the most iconic technology firms in the world, AMZN revolutionized the concept of e-commerce. In doing so, the company transformed society. Yet even with its myriad accomplishments, value matters. With Amazon stock screaming to all-time highs, it begs the question: is it worth the price of entry now?
On one hand, Amazon stock deserves every uptick in market value. The underlying company shattered analysts’ expectations for its fourth quarter of 2019 earnings report. Prior to the disclosure, Wall Street forecasted earnings per share to come in at $4.03. Instead, AMZN delivered $6.47, putting in the rear-view mirror disappointing per-share profitability misses in Q2 and Q3 of this year.
For revenue, covering analysts anticipated a haul of $86.02 billion. Yet again, AMZN rang in another robustly positive surprise with $87.44 billion. In the year-ago quarter, Amazon generated top-line sales of $72.4 billion. Notably, the company’s cloud division, Amazon Web Services, had $9.95 billion in revenue, up 34% from Q4 2018. Consensus called for $9.81 billion.
Unsurprisingly, then, Amazon stock skyrocketed off the results. Shares have continued to make gains from there, with one likely reason that AMZN shifted consumer behaviors and expectations. Today, the modern consumer has increasingly prioritized retail via online channels, not physical ones.
Still, our own Chris Markoch raises a good point that Amazon stock is a conviction play. In other words, you must be overwhelmingly certain that shares will continue moving higher. Otherwise, you’re buying an excellent company at too rich a premium.
I understand the hesitation. Still, Amazon stock today isn’t as crazy as you might think.
Amazon Stock Is Permanently Etched into the Economic Landscape
Before I get into my argument, let me caveat by saying this: I’m not recommending that investors go out and buy shares right now. For reasons I’ll explain later, I think waiting is a better call. But from a broader picture perspective, AMZN hasn’t gone into looney-ville yet.
I say that because the concept of e-commerce is a proven economic phenomenon. As I’ve cited many times, online transactions represent more than 11% of all retail sales. This trend is almost guaranteed to move higher in the coming years.
Why? From young to old, consumers recognize the convenience of shopping from home. Moreover, Amazon has steadily made progress in cutting down shipping times, as well as innovating new mechanisms for product shipments. From every angle, the company is becoming more useful, bolstering the case for Amazon stock.
Additionally, AMZN’s competitors are scrambling for an answer. With faster and cheaper shipping times, physical retailers like Walmart (NYSE:WMT) and Target (NYSE:TGT) are becoming less relevant. After all, the most compelling draw for physical stores in a digitalized world was the convenience of immediacy. While brick-and-mortars still hold this advantage, the lead has narrowed due to Amazon’s ever-expanding delivery infrastructure.
Plus, as AMZN becomes more powerful, the organization’s dominance becomes a self-fulfilling prophesy. Successful expansion leads to economies of scale which sparks more successful expansion.
It’s unlike any other industry, say for instance electric vehicles. Although Tesla (NASDAQ:TSLA) utterly dominates the EV space, infrastructural limitations necessarily cap the automaker’s upside for the next several years. That’s not the case with Amazon, which is basically creating its own infrastructure.
Thus, the year-to-date surge of slightly over 15% in Amazon stock is quite reasonable given the underlying innovations and overall impact.
Coronavirus Epidemic Is Still a Concern
Though I like the longer-term outlook for AMZN, I believe prospective buyers can get a better deal with patience. I say this because of the coronavirus from China, which is a headwind that I don’t think we’re fully appreciating.
On the midweek session of Feb. 12, the Dow Jones surged 200 points to a record high due to the easing of coronavirus fears. At the time, China reported infection cases that represented a week-over-week slow down in the virus’ growth rate.
But during the afterhours session, headlines flashed that the Chinese government adjusted its diagnostic criteria. With this update came a new figure: 14,840 new cases just in Hubei Province alone, the epicenter of the outbreak.
At time of writing, the New York Times is reporting 48,206 infected, with 1,310 deaths. Genuinely, I’m not trying to stoke fear or panic. However, in my opinion, China has lost control of this crisis. And that’s perhaps why the Centers for Disease Control and Prevention has warned that the coronavirus could “take a foothold in the U.S.”
Therefore, the smart play is to avoid piling into hot names like Amazon stock right now. As I said, I don’t believe the Street fully appreciates what’s going on here. When it does, that should be a better time to consider AMZN.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.