Amazon.com, Inc. (AMZN) is one of a handful of companies that are benefiting from the COVID-19 pandemic. Its e-commerce, AWS, and Prime divisions are all seeing strong growth. Charles B. Carlson, CFA, editor of DRIP Investor has some good insights into its retail growth.
He says, “Retailing hasn’t exactly been the sweet spot of this market for the last several years. Brick-and-mortar retailers, in particular, have had a rough go of it, and the actions taken to combat the coronavirus will most likely be the death knell for some retailers and severely cripple others.”
“However, one retailer that remains in a unique position to thrive both in the near and long term is Amazon.com. Indeed, the retailing giant’s online business model continues to show its strength. The stock has held up relatively well during the recent market downdraft. It is possible that consumer spending will be severely hobbled over the next six months, which will matter to all retailers, including Amazon.
“But from a stock perspective, I expect these shares to continue to show good resilience relative to the market. Though not cheap based on traditional valuation metrics, the shares have become a “must have” for growth investors.
“And due to the recent implementation of a direct-purchase plan, Amazon shares are accessible for virtually any investor, regardless of the size of his or her pocketbook.
“While it seems like it has been around forever, Amazon is still a relatively young company. The firm, incorporated in 1994, started out as an online marketplace for selling books. Over the years, the company has grown into a global retailing and services juggernaut, focusing on ecommerce of all kinds, cloud computing via its Amazon Web Services (AWS) business, and digital streaming.
“Sales in Amazon’s most recent quarter totaled $87.4 billion, up nearly 21% over the year-earlier quarter. The firm now has over 150 million paid Prime members around the world, a very nice annuity-type cash stream. Amazon’s reach provides it with a plethora of opportunities. In fact, founder Jeff Bezos has said that “your margin is my opportunity,” implying that Amazon has the ability to disrupt virtually any industry.”
Contributor Jon Markman, editor of Pivotal Point, agrees, saying:
“The COVID-19 crisis is pushing supply chains and logistics networks to their limits. Something has to give soon. [Recently] Amazon.com signed an agreement with the Canadian government to distribute critical medical supplies nationally. The partnership is a big step forward for private companies.
“With people being quarantined at home, they are utilizing Amazon.com, trusted by nearly 112-million Prime members, as their personal supply chain for food and essential supplies. A Morning Consult research study found that Amazon.com was the most trusted public company in United States. It is more trusted than the police, labels on food packaging and capitalism.
Given this sentiment, the investment calculus for Amazon is strong. Shares trade at 48x forward earnings and 3.4x sales. While both metrics may seem exorbitant, they are far below historical norms and neither reflect the true potential for long-term growth even in this market.
“The COVID-19 pandemic exposes investors to the reality that most consumers have known for a long time: Amazon is a well-managed business that treats customers well and is renowned for its reliability. In times of uncertainty, reliability is more important than ever. Investors should continue to use all weaknesses to buy Amazon shares.”
I delved into the company a bit more, noting that Amazon is actually benefiting on three levels from the coronavirus pandemic.
First, streaming. Strategy Analytics estimates that worldwide demand for subscription streaming video services will see a 5% increase this year from the stay-at-home orders. That amounts to some 47 million more subscriptions, industry-wide, than the previously forecast 96 million, for a total growth rate of 18%.
That’s great news for all the streaming services, but especially for Amazon. That’s because it’s a two-fer, which leads me to the second way Amazon is benefiting from the virus. Not only does the company profit from the rise in streaming, but because both Disney+ and Netflix use its Amazon Web Services (AWS) to deliver their streaming products, Amazon will also make money from that channel. And AWS—already accounting for two-thirds of the company’s operating income and $35 billion in revenues—is ready to attract more investors with its offer of $20 million worth of credits and technical support to those AWS customers who are developing faster COVID-19 testing. Wedbush Securities estimates that Amazon Web Services alone could be worth a half a trillion to a trillion dollars in the near future.
Lastly, the third way Amazon is poised to reap profits from the virus is the stunning rise in e-commerce sales since the pandemic began. Researchers at Listrak estimate that online sales have risen 40% since the virus started its global devastation. Amazon’s Prime revenues last year were $19.21 billion. And its online stores—product and digital sales—brought in $141.25 billion. The company’s total e-commerce business accounts for 40% of all U.S. online retail sales and its grocery business was just ranked #1 for new online shoppers, so expect a really big bump in sales this quarter.
Merrill Lynch analyst recently climbed on board the stock (along with 41 other analysts who rate the company ‘Buy’), noting, “Amazon’s logistics infrastructure “could be the 4th leg of the ‘services’ stool.” His analysis concluded that Amazon already has a first-party (1P) relationship with its customers, acting as the retailer who sells branded merchandise, and it has now moved into 3P, as a third-party retailer of e-commerce, advertising, and cloud services, selling its own brand directly to the consumer via its online site.
The analyst focused on Amazon’s fulfillment centers, which have grown from 16 in 2009 to 1,137, cementing the company’s place as the U.S.’ 4th largest delivery company. And Amazon delivers almost one-half of its 4.5 billion packages a year through its own delivery network of planes, vans, drones, and sidewalk robots.
Other analysts have recently raised their price targets for AMZN, up to $2,800.
The latest stats back up the potential for Amazon. While retailers around the world are suffering and even closing stores, the Guardian reports that Amazon customers are spending almost $11,000 a second on its products and services, according to the Guardian.
While the shares have been on a tear, if you value each of its businesses separately (all of which could be spun off), the valuation of the shares of Amazon with its unprecedented retail growth looks pretty attractive.