Harriet Lefton

About the Author Harriet Lefton

Harriet originates from the UK where she worked as a journalist specializing in the metal markets. She graduated from the University of Cambridge before becoming a qualified UK lawyer.

3 Reasons Why Amazon.com, Inc. (AMZN) Stock Is a Solid Pick

Critics may point to Amazon.com, Inc. (NASDAQ:AMZN) investment spend putting pressure on its profitability, or the fact that (perhaps surprisingly) it only has a 5% share of the worldwide e-commerce market, or even that the stock is far from being in “deep value” territory as it trades at high multiples, but even these critics may struggle to give the market much pause for thought at this stage of the buying rush.

Here are three reasons why a bullish outlook on the e-commerce giant is justified:

  1. International Expansion Plans – in 2015 Amazon made $79 billion. This sounds very impressive but it is ‘small’ fish in a global market worth $1.548 trillion ecommerce market. Amazon has already seen quick success in India and now a leaked report reveals the company’s plans to expand into Southeast Asia (in particular Indonesia, Malaysia and the Philippines) via Singapore in the first quarter of this year. These are all rapidly expanding markets: by 2030 it is estimated that each will have $1 trillion+ economies. Amazon can export its ecommerce site and its service offerings including Amazon payments, Echo and the Kindle as well as its video streaming and cloud services. Why now? Amazon is in a race against Facebook. The social media giant is already popular with businesses in Vietnam and has a payment services trial in Thailand that could be introduced to other countries in the region soon.
  2. The Cloud – Amazon web services (AWS), its cloud computing unit, is a huge profit maker for Amazon. Even though the cloud is a crowded market, a Gartner report reveals that AWS is already 10 times larger than the next 14 competitors combined (including Microsoft, Oracle and IBM). In Q1-Q3 2016, AWS contributed less than 10% of Amazon’s revenues but over 20% of its EBITDA, and the majority of its operating income. Why is AWS so popular? AWS isn’t afraid of cutting prices- from 2008 to 2016, AWS cut its cloud storage service from 15 cents per GB to 2.6 cents per GB. Meanwhile, the service’s functionality and sheer pace of upgrades keeps consumers happy. Last year AMZN added 722 new features and services and it has even more planned for this year especially following its partnership with private cloud services provider VMWare.
  3. R&D Spend – for the last few years AMZN has spent 8 -12% of its sales on R&D (e.g. 11.7% in 2015). This is actually a much higher figure than many other companies. For example, Overstock and Wayfair spend 5-7% of their sales on the same kind of expenses. The outcome of higher R&D spending: hopefully new and more exciting product lineups in the future. CEO Jeff Bezos said recently “Innovation is one of our guiding principles at Amazon”. This isn’t just talk. The focus on innovation is obvious across a range of Amazon developments including experimenting with delivery by drone, using robots in its fulfilment centers to speed up delivery time, a new Prime credit card in collaboration with JP Morgan Chase and even its patented 1-click ordering process (subsequently licensed to Apple).

Out of the 32 analysts polled in the past 3 months, 30 rate AMZN stock a Buy, while only 2 rate the stock a Hold. With a return potential of just over 15%, the stock’s consensus target price stands at $951.37 compared to the current share price of $825.86.

Disclaimer: The author has no positions in the stock mentioned. This article is intended for informational and entertainment use only, and should not be construed as professional investment advice.

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