In-line with my previous expectations, Amazon (NASDAQ:AMZN) appears to be more quickly implementing significant new initiatives. Meanwhile, some investors appear to be overly worried about the company’s margins. Given these points, I remain very optimistic about the outlook of AMZN stock.
Moreover, the shares are down 8.4% over the last month, making their valuation more attractive.
Quickly Implementing Many New, Promising Initiatives
In a May 2021 column on AMZN stock, I wrote that the conglomerate “has several high-potential initiatives. These include a food delivery service in India, cashier-free stores and “home robots” powered by artificial intelligence (AI).” I also pointed out that “Blackberry (NYSE:BB), the Canadian IT security company is working closely with Amazon to develop an app store for connected vehicles. ”
And finally, I predicted that Amazon’s new CEO, Andy Jassy would “push himself, his top aides and the entire company to work hard.” I added that Jassy’s extensive tech background and his tremendous success at the company’s cloud unit, AWS, suggested that he would be highly effective in his new position.
Now, after Jassy took over in July a number of the upcoming initiatives either are bearing fruit or will do so very soon. And the speed with which these projects are progressing suggests that I was correct about the new CEO lighting a fire under the company’s employees.
For example, on Sept. 24, it unveiled a new bundling option for its internet video service in India, and on Sept. 29, the conglomerate introduced “a home robot called Astro, which rolls around the house autonomously,” according to Zacks. It’s also launched a new visual version of its Alexa system and new health and fitness tracking products.
Finally, BlackBerry CEO John Chen in September reiterated that the beta version of the new auto app store it is launching in partner is due out this month.
Amazon Is Likely Not as Vulnerable to Labor Costs, Inflation as Some Fear
On Sept. 27, Morgan Stanley analyst Brian Novak cut his price target on AMZN stock to $4,100 from $4,300, citing higher labor costs and elevated costs. Novak also reduced his EBIT estimates for the conglomerate by 16% for this year and 19% for 2022. Since Novak issued his note, AMZN stock has fallen about 6%.
But I think that the analyst may be ignoring the multiple steps that Amazon can take to keep its margins from dropping a great deal. One such step, I believe, is raising AWS’ prices. Many of the large companies that use AWS’ services likely have the ability to pay 10%-20% higher prices for them., and such price increases are unlikely to cause them to go through the headache of transferring to one of AWS’ competitors.
Meanwhile, Amazon’s Whole Foods supermarket chain will add a $9.95 surcharge onto delivery orders starting on Oct. 25,. Also helping the company’s margins will be its increasing, very profitable digital advertising business and its higher profitability overseas.
According to Seeking Alpha columnist Bluesea research, the company’s overseas operating income for the first half of 2021 came in at $1.67 billion, up from -$51 million during the same period a year earlier. The firm wrote that the year-over-year” improvement in operating income of international regions contributed to 20% of the total {YOY} growth of {the company’s} operating income during the first half of 2021.”
As the top line of Amazon’s international business grows, Blueseas research anticipates that the portion of the company’s operating income growth that the business contributes will also climb. Higher Prime membership growth overseas, along with the accelerated growth of Amazon’s overseas ad business, is boosting its foreign profits, the firm explained.
The Bottom Line on AMZN Stock
Under Amazon’s new CEO, the company is rapidly implementing promising new initiatives, and the market is underestimating the opportunities that the conglomerate has to raise its margins,
Meanwhile, the shares are trading at a relatively low forward price-earnings ratio of 47.8, down from 57.7 in June and 60.2 in December 2020. In light of these points, AMZN stock is worth buying now.
On the date of publication, Larry Ramer held a long position in BB. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
