Even after doubling in price to become a $1 trillion company in the last year, Amazon.com Inc. (AMZN, Financial) could have investment appeal.
The e-commerce company’s investment in its virtual assistant, Alexa, may provide it with a dominant position in the smart home market. Its expansion in India could offer a larger slice of the growing retail segment, while its business-to-business division’s high growth rate looks set to continue.
While the company’s valuation may be relatively high, a focus on the more profitable areas of its business could help to justify further stock price growth. Having outperformed the S&P 500 by over 80% in the last year, the company’s growth momentum looks set to continue.
Growth strategy
Amazon’s long-term financial prospects could be boosted by its plans to release up to eight new Alexa devices by the end of 2018. Its virtual assistant is set to feature more prominently in its customers’ lives, with the number of access points expected to increase. This could boost the company’s momentum in the lucrative smart home market, with Alexa set to play a pivotal role in connecting a variety of devices as the internet of things becomes increasingly prevalent. With a growing number of third-party manufacturers integrating Alexa into their devices, the company could grow its market share in the wider connected device marketplace over the long run.
The company’s business-to-business division has the potential to catalyze its profitability, with the segment growing to $10 billion in annual sales in four years. The business-to-business e-commerce market is estimated to be worth $9 trillion in the U.S., with an even larger market available to the company due to its international expansion. It currently operates in eight countries, selling a wide variety of products. It provides companies with the ability to integrate their sales with procurement software. In the long run, it has the potential to become bigger than the company’s business-to-consumer division.
Retail potential
Amazon’s acquisition of Whole Foods just over a year ago could allow the company to become increasingly competitive in urban areas. The company has integrated its Prime membership program into the grocery store, with members receiving discounts on a number of items. Prime members also receive 5% cash back when using their Amazon credit card.
The company has also been offering free delivery for Prime members, as well as free collection at some stores. This has helped to increase the proportion of Whole Foods customers who visited a store at least six times in the last year from 9% to 11% since the acquisition. With the potential to move into suburban areas and offer free delivery across all stores, Whole Foods could generate improving sales figures.
Amazon’s retail opportunity in India could benefit from its purchase of a stake in grocery retail chain More. It has 575 stores in the country currently, with that number expected to increase by up to 150 stores per year. A growing offline presence in India could provide Amazon with the capacity to offer a wider range of delivery options. An increased omnichannel presence may help it to corner a larger part of the Indian grocery and wider retail marketplace, which is forecasted to be worth $1 trillion by 2020.
Profitable growth
Since Amazon's stock price has risen sharply over the last couple of years, it has a price-earnings ratio of 154. Although the company has had a high price-earnings ratio for a long period due to its relative lack of profitability and its increasing popularity among investors, there is a risk that investors will shift their focus away from sales growth and toward profit growth. In such a scenario, the company’s valuation could be viewed as excessive since growing sales must ultimately translate into rising profits in order to justify a high valuation in the long run.
The company’s exposure to digital advertising could help it to become increasingly profitable. The division generated $2.2 billion in revenue in the most recent quarter. The industry was worth $88 billion in 2017, with the dominant company in the segment, Alphabet (GOOG, Financial), having an operating margin of 24% last quarter.
Amazon’s growing Prime membership, which recently reached 100 million around the world, has the potential to maintain more customers within its ecosystem. This could help to drive profit growth across its business.
Cloud computing has produced 27% margins for the company over the last year. With it set to become increasingly dominant in the serverless cloud computing space, the segment could generate improving profitability for the company in the future. This could help to justify its high valuation.
Outlook
Although Amazon's stock price has doubled in the last year, it appears to offer investment potential. It could become an increasingly dominant operator in the smart home market, while its business-to-business division’s growth potential seems to be high.
It could continue to win customers in its Whole Foods segment as it rolls out the benefits of Prime membership to more stores. Growth potential in a rapidly evolving Indian retail market may also be high.
Therefore, after significant outperformance of the S&P 500 in recent months, the company’s stock could make further gains.
