Amazon is a great place to own. How long can this continue?
Amazon‘s (AMZN 1.30%) Stocks have made extraordinary gains over the past few decades. The share price has risen by 975% in the past decade. S&P 500‘s 167%.
This has been very rewarding to long-term investors. You may be tempted to hang on or, if you do not own shares, join the group.
The stock’s performance in the past does not tell us anything about its future. Investors need to conduct a thorough analysis of Amazon in order to make an informed choice. Fundamental Analysis.
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Cloud computing slows down
Amazon Web Services is a leader in cloud computing. It has experienced rapid growth, and it generates high profit margins.
AWS offers cloud-based services to companies that allow for the use of analytics, including database tools and analytic software. The sales growth rate has slowed down, though. AWS sales for the fourth quarter increased by a respectable 13%, to $24.2 Billion. The top line grew 28% a year ago. But that pace is hard to keep.
AWS is the most profitable segment of Amazon. Operating income for Q4 rose by 37.7%, to $7.2 billion.
AWS has maintained its position as a leader in the industry. Market shareIt has eroded. Synergy research group reported that it had dropped from 33% to 31% by the year 2023. Other major competitors include MicrosoftAzure is a blue-green color. AlphabetThe market share for each of these companies was 24% and 11 %.
E-commerce
Amazon is known for its ability to conduct online shopping. It’s also a very popular method of purchasing items. According to the U.S. Census Bureau, in the U.S. ecommerce sales accounted for 15.6% of the total retail sales during the fourth quarter last year. This is up from 14,9% during the same period last year. Amazon will benefit if the market share increases. Amazon offers cheap prices, convenient shipping, and fast delivery.
The business does not generate much profit. North American and International segments are largely made up of third-party vendors, online retailers, and physical stores. North America’s Q4 revenue grew 13%, to $105.5 billion. The operating profit was $6.5 billion, compared with a loss of $240 million last year. Sales grew 16.8% in the international division, yet it still lost $419 millions.
They are not just retail businesses. Advertising, for example, is a fast-growing business that saw a 26% increase in sales to $14.7 Billion during Q4. Amazon has a huge customer base and an abundance of data. This is a growing area.
Premium valuation
Amazon stock is priced higher than the S&P 500. Shares have an price-to-sales (P/S) The S&P 500 is 2.7 times sales, while Amazon’s shares have a P/S ratio of 3.2. Amazon shares were valued at around 2 P/S a year ago.
A higher multiple indicates that the market is expecting Amazon to have a rapid growth in profits. The management expects operating income in Q1 to increase between $8 billion to $12 billion or by 67% to 1500%, based on an 8%-13% growth of sales.
The short-term prospects are good, but what about long term? Amazon is a leader in the e-commerce industry, and its advertising division has been growing rapidly. This is a business with low margins. AWS, which is highly profitable but has experienced a slowdown in growth after a rapid pace. The market share decline is what I am most concerned about.
As such, I would continue to buy Amazon stock while refraining from making any new investments until there is tangible proof that AWS’s lost ground has been regained.
Suzanne Frey is an Alphabet executive and a board member at The Motley Fool. John Mackey is a former CEO at Whole Foods Market (an Amazon subsidiary) and he’s a board member for The Motley Fool. Lawrence Rothman CFA The Motley Fool has no positions in the companies mentioned. The Motley Fool recommends and has Alphabet, Amazon and Microsoft. The Motley Fool suggests the following: long January 2020 $395 Microsoft calls and short January 2020 $405 Microsoft calls. The Motley Fool is recommending a Disclosure policy.