The e-commerce titan has many reasons to continue performing well in years to come.
Amazon (AMZN -2.56%) Over the past two decades has generated enormous wealth for investors.
Is it now too late for those investors to include Amazon in their portfolio who still haven’t bought the stock? Answering that question is as simple as asking three questions: Is the business a success? Has it good prospects? Is the price of the stock attractive?
Amazon is a profitable business.
Investors can evaluate the business model of a firm in many different ways. Two elements are important to consider: barriers to entry and customer capture.
The term “customer captivity” refers to how loyal customers can be to one company, brand or product. This makes it hard for them to change to another. Amazon’s customer captivity has been high due to several factors.
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Take a look at the following: e-commerceAmazon, as an example. Amazon, the biggest e-commerce site in the U.S. offers the widest selection of goods at the best prices. Customers can find anything they want (at affordable prices) without having to use a separate platform. Amazon has a large delivery network, which makes receiving orders easy and fast. Metro areas offer a wide range of products that can be delivered the day after an order is placed.
Amazon Prime Membership is a great way to get all of the benefits mentioned above. Customers can pay an affordable price and receive a variety of benefits such as exclusive offers, free shipping, streaming, and more. Prime will continue to grow in benefits over time, so customers won’t have any reason to switch online retailers, particularly once they get into the habit of buying from Amazon.
Next, we will assess how difficult it is for other competitors to compete with Amazon. Amazon is a winner for a number of reasons. Amazon, for example, is the biggest e-commerce site in the U.S. with a 37.6% share of the market. This gives it a huge scale advantage against its competitors. Amazon can take advantage of its scale to obtain very competitive prices and to operate with the lowest operating costs (thanks in part to operational leverage). This allows it to maintain its low price strategy.
Amazon has made massive investments in technology and infrastructure over the past few years, including in logistics and operations. This allows it to provide one of, if not the, best online shopping experience. It would take rivals years, if not even decades to recreate such infrastructure.
Amazon is the most dominant online retailer in key markets. It’s hard to compete with Amazon because of its high level of customer loyalty and huge barrier to entry.
What is Amazon’s outlook for the next few years?
Amazon was a great growth stock, but it won’t be of any use to investors in the future unless they continue to grow. Amazon has good prospects for the future.
Cloud computing is Amazon’s second major business, after ecommerce. Amazon Web Services (AWS), the company that provides cloud computing infrastructure, has 31% of the market worldwide. AWS, like its ecommerce sister, enjoys an advantage in scale, which is passed on to the customer at low prices. Newcomers find it difficult to provide a wide range of services for low prices that will attract customers. This is due to high switching costs. There is still a risk of competition from the existing tech giants, like Microsoft You can also find out more about the following: Alphabet These companies will gain market share at Amazon’s expense over time, as they are actively expanding their cloud business. The vast tailwinds that are ahead include migration to cloud computing and development of artificial intelligence AI offers multiple growth prospects for players.
Amazon has also a way to go in its e-commerce operations, despite the fact that it holds a significant share of online retail sales. Its total share on the U.S. market for retail is still less than 10%. The retail market share can be increased by relying on the continued increase of ecommerce and the expansion of offline stores. It can also rely on its overseas expansion into emerging markets such as India to maintain the momentum of growth.
Amazon can grow (despite its enormous size) in the near future.
Investors can buy this stock for a fair price.
Investors’ investment analyses are never complete unless they consider the valuation of the stock. This is about ensuring that investors aren’t overpaying for stocks, regardless of their quality.
Investors can choose simple metrics over the endless array of valuation tools. It is better to get it right than wrong. Amazon’s PS ratio, for example (price-to-sales ratio), is currently 3.4. This ratio falls within the range of the five-year average. This ratio has ranged from a low point of 1.7 to a maximum of 5.6 over the last five years.
Considering the quality of Amazon’s business and its prospects, it is still reasonable to buy Amazon’s shares today.
Amazon stock is a good option for investors with a strong belief and long-term outlook (at least three years).
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 Nga 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 a Disclosure policy.