Amazon.com, Inc. is the world’s largest online retailer and its stock is always one of the most tracked on Wall Street. Since its inception, Amazon has grown to become a real technology juggernaut whose worth is only topped by a handful of companies. The company engages in the retail sale of consumer goods in North America and internationally. It operates through the United States, International, and Amazon Web Services segments. Amazon’s stock has always been a curious one. The company continues to report profits barely above breakeven point but its stock price has always continued to soar. This has always prompted critics to suggest that the company is in some kind of bubble that will very soon burst. This of course has never happened, with the company continuing to be an innovation leader with investors showing full confidence in its stock. So should you also be holding on to your Amazon stocks?
Q4 2015 Earnings
The company only recently released its Q4 2015 earnings report that gave investors an insight into Amazon’s future outlook. The earnings came in relatively short of the huge expectations that Wall Street had of the company. Amazon reported earnings of $1.00 per share against expectations of $1.56, with higher fulfillment and shipping costs cited as the main causes for the decline. Worldwide revenues increased 22% to $35.7 billion, or 26% when not factoring in the impact of currency exchange swings, but even this amount did not meet the consensus estimates set at $35.93 billion. Amazon also reported that worldwide active customer accounts were approximately 304 million. Not including customers who had free orders in the preceding 12-month period, active customer accounts were approximately 280 million, representing a 26% growth from the previous year. Paid Prime members increased 51% y/y whereas worldwide active Amazon web services customers topped 1 million. Amazon Web Services (AWS) sales came in at $2.405 billion in Q4 2015 compared to $1.42 billion in Q4 2014. AWS continues to post incredible growth margins and it will remain a key area for the future of the company.
2015 was an amazing year for Amazon, as it reported profits for three consecutive quarters. Its stock also more than doubled to nearly $700 each, before drifting lower to current levels of below $600. This has obviously concerned investors who are keen protect the paper profits they had already realized. A key area of concern is the company’s trailing P/E (price earnings) of 850 which indicates that the stock is massively overpriced. While forward P/E looks better at 105, it appears relatively high compared to its estimated annual growth rate of 60% over the next 5 years. But technology companies have always been known to breach conventional accounting and mathematical philosophies. It is, therefore, vital to look at the fundamentals of the company’s business.
Online Retail Growing
Amazon’s core business is retail. While Amazon has witnessed its stock drift lower, there is nothing dramatic that has happened to the company itself or the retail industry. In fact, the number one trend of offline businesses is to offer their products online. While Amazon reported sales revenues of over $100 billion in 2015, mega offline retailers such as Wal-Mart and Kmart reported a drop in sales. Last month, both companies announced closures of a number of their stores. The National Retail Federation reported that online shoppers outnumbered their brick-and-mortar counterparts during the Black Friday weekend in the United States. If this trend continues or accelerates as data shows, Amazon will be the clear winner.
The Amazon Prime service, that witnessed a growth of 51% in membership last year, is very critical to the future of Amazon. The company does not make public the exact figures of the service but it is estimated that there are almost 80 million customers subscribed to the service worldwide. The subscription priced at $99.99 annually offers customers free shipping, free 2-day delivery and flat-fee grocery deliveries. Subscribers also get to enjoy ad-free music streaming, unlimited photo storage and free Kindle eBook rentals among other benefits.
Amazon Prime could help the company build and enhance the loyalty of their customers. The service is guided by the wisdom that ‘the longer the customer stays, the more money he spends’. A recent RBC Capital Markets survey indicated that 49% of first-year Prime members and 68% of year-four subscribers spend over $800 each year on Amazon. Last year, Amazon reported that it gained 3 million new Amazon Prime members worldwide “in the third week of December alone”. It also reported that it shipped over 200 million more items for free to Prime members compared to the previous year. The Amazon Prime service looks to guarantee and enhance sales for company in the foreseeable future.
The Growth of Cloud Computing
Amazon Web Services (AWS) continues to post high profit margins in its short reported history. In Q4 2015, which was only the fourth quarter Amazon was reporting the numbers, AWS logged in profits of $687 million on sales of $2.4 billion. The customer base has also exceeded 1 million as more businesses leverage technology to improve their competitive edge. AWS, which leases computer power, data storage space, networking as well as other complex computer services, such as databases and analytics to clients, is the acknowledged leader in cloud computing services. Last year, AWS had an annual run rate just shy of $10 billion and with the industry expected to grow from $49 billion in 2015 to $67 billion in 2017, the division is set to be a significant contributor to Amazon’s top line. AWS will no doubt face competition from deeper pocketed rivals in Google and Microsoft, but it has a significant head start over them, having built its infrastructure and experience since its inception in 2006.
What Analysts Expect
The current stock price of Amazon is $534.90 and many analysts have maintained their bullish tone on the company even after weaker-than-expected Q4 earnings. Key analysts that remained bullish include JPMorgan who have kept an Overweight rating while raising the price target to $825 from $800. S&P Capital IQ kept its target at $685 but raised 2016 earnings estimates by $0.91 per share to $5.46 whereas Bank of America Merrill Lynch have kept their Buy rating but lowered the price target to $750 from $775.
Should You Hold Then?
The current price levels are the lowest the stock has seen for many months. Amazon has strong fundamentals and is the leader in consumer ecommerce and cloud computing. The stock is a solid long term buy as Amazon continues to expand its dominance in the two market segments, while making it harder for rivals to compete. It therefore makes all sense to hold onto your Amazon stocks and to wait for the next boom cycle. Nevertheless, impatient investors can explore profitable opportunities in other financial markets such as binary options trading where they can continue making high returns trading the Amazon stock price, regardless of the direction the price moves.