The world’s largest e-commerce retailer, Amazon.com (NASDAQ:AMZN), continues its upward journey this year, defying expectations that the high-flying stock has become too expensive and is due for a major correction. We see the company's strong competitive position and multiple revenue generators as powerful engines for further and sustained growth, despite the soaring price of the shares.
Trading at $1,814.19 at yesterday's close, Amazon's shares have gained about 23% this year, adding to the more than 25% rise of the past year. And the company’s growth momentum suggests there is nothing in the short-run that can impede the stock’s ascent.
The furious and sustained rally that pushed Amazon shares some 430% over the past five years means this tech giant now appears expensive. At a lofty 90 times price-to-earning multiple, Amazon stock isn’t cheap by traditional standards and a sharp correction could follow at the first sign of danger.
To support this argument, bears cite Amazon’s slowing sales growth last year, its increasing cost of doing business, and its difficulties in taking its success story to overseas markets. Amazon sales slowed for the third consecutive quarter in Q4 2018, rising 19.7%, the smallest quarterly jump since 2015.
Amazon is predicting revenue of $56-$60 billion for the current quarter. On the low end of Amazon’s range, revenue would be up only about 10% from a year earlier. That would amount to its worst showing since 2001.
But despite these trouble spots, we continue to like Amazon stock for long-term, buy-and-hold investors. Investing in technology stocks isn’t without risks, especially at this late stage of the bull-cycle which is showing some signs of peaking. But for long-term investors, Amazon is still one of the best bets among high-growth technology stocks. Here are our two primary reasons to support the stock’s high premium valuations:
1. No Let-Up In Consumer Shift To E-Commerce
What makes us comfortable in recommending Amazon stock is the company’s wide economic moat, a term coined by the world’s most successful value investor, Warren Buffett, to define companies which have a sustainable competitive advantage. Amazon certainly fits nicely in this category.
It has the power to defend the dominant position in online retail it's established over the past decade. Shoppers will spend $484 billion globally on Amazon this year, up 26% from 2018, and the Seattle-based company will capture more than half of all online spending in the U.S., according to EMarketer Inc.
2. New Growth Drivers Emerging
Besides the company’s wide competitive advantage in e-commerce, Chief Executive Officer Jeff Bezos is also opening several new areas of growth beyond the low-margin business of selling goods online.
Amazon runs the biggest cloud platform in the world, serving large corporate customers. Amazon Web Services, known as AWS, is growing at a rate of more than 40%.
Amazon’s digital advertising business, another high-margin venture, is expanding at a triple-digit rate. Backed by these extremely profitable units, Amazon has been able to disrupt many industries and can continue to do so for a long time.
The company also has a hardware unit producing an expanding line of smart speakers and video streaming gadgets. Its Amazon Studios division makes original television shows and movies and has begun to challenge Netflix (NASDAQ:NFLX) and HBO (NYSE:T). Its ambition in the brick-and-mortar retail space is not a secret anymore after its acquisition of Whole Foods Market and its growing fleet of cashier-less convenience stores.
Bottom Line
Because of Amazon’s premier position in many of the areas in which it operates, its stock is one of the safest bets in the tech sector. Amazon e-commerce business continues to show a blistering growth trajectory and its earnings momentum from AWS and digital advertising remains strong. Analysts, on average, expect more than 40% growth in its profit each year over the next five years. If that happens, it’s more than enough to justify the rich valuation of Amazon stock.