After a run up of almost 120% in 2015 in Amazon.com, Inc. (NASDAQ:AMZN) stock, it’s almost hard to imagine that a $227-billion company can climb higher. But after you take a look at what the e-commerce giant has in the works, it’s not hard to see how AMZN stock could push to new heights.
Goldman Sachs says that even at its current price-to-forward earnings ratio of 67, Amazon is still cheap and is a definite buy. (Source: “Goldman Says Investors Should Still Be Ordering Amazon,” Fortune, April 4, 2016.) Amazon was one of the names on Goldman’s conviction list, which lists the stocks the investment firm believes will be top performers for the year.
So why is Goldman Sachs so upbeat on AMZN stock? Let’s take a look.
The Amazon “Echo” is Amazon’s attempt to dominate your home, which could prove to be a major growth catalyst.
When Amazon launched the Echo in late 2014, it was a device that did very little other than being able to play music, get weather updates, or answer fact-based questions with voice commands. It was hard to see what its purpose was.
But last spring, Amazon opened up the software development kit (SDK) for “Alexa,” the personal assistant behind Echo, much like Apple Inc.’s (NASDAQ:AAPL) “Siri” on the “iPhone” or Microsoft Corporation’s (NASDAQ:MSFT) “Cortana.” Shortly after, Echo was able to deliver sports scores, news, traffic reports, and more.
In recent months, Amazon has focused on turning the Echo into a home management device that ultimately will control your home.
Now, with a smarthome-compatible device, Echo can be used “to switch on the lamp before getting out of bed, turn on the fan or space heater while reading in your favorite chair, or dim the lights from the couch to watch a movie—all without lifting a finger…or even raising your voice.” (Source: “Amazon Echo,” Amazon.com, last accessed February 17, 2016.)
That’s all great, but the Echo is about to get a lot smarter, as a number of partnerships were announced in February. Echo users will be able to order Domino’s Pizza, Inc. (NYSE:DPZ), play music through Spotify, or summon an Uber driver.
“Amazon Web Services” (AWS) is the undisputed leader in the public cloud computing space. AWS rents out computing power, data storage space, and networking services as well as provides database and analytics services.
Amazon holds a commanding lead, with 36.9% of the market, while Microsoft and Alphabet Inc (NASDAQ:GOOG) trail far behind with 8.7% and 2.5% of the market respectively. (Source: “Amazon and Microsoft to Face Off in Cloud Computing Space,” Market Realist, February 9, 2016.)
In its most recent quarter, Amazon’s cloud computing business, generated sales of $2.4 billion and net income of $687 million. That puts Amazon Web Services’ annual run rate at about $10.0 billion. (Source: “Amazon Cloud Logs More Growth,” Fortune, April 5, 2016.)
There’s lots of growth ahead in this space that Amazon can capitalize on. The cloud computing market is expected to rise to $27.4 billion in 2016 compared to $14.9 billion in 2014, according to Synergy Research Group. (Source: Ibid.)
Own Shipping Service
In February, Bloomberg uncovered a 2013 report from Amazon that described the expansion of a logistics plan called “Fulfillment By Amazon,” which provides storage, packing, and shipping for merchants selling on Amazon. (Source: “Amazon Building Global Delivery Business to Take on Alibaba,” Bloomberg, February 9, 2016.) The report envisioned a global delivery network that would control the flow of goods from factories around the world.
Amazon has downplayed its ambitions in logistics, but the company announced in mid-March that it is leasing 20 Boeing Co (NYSE:BA) “767” cargo jets from Air Transport Services Group Inc. (NASDAQ:ATSG). Amazon has also leased thousands of truck trailers and has received a license to expand into ocean freight. (Source: “Confirmed: Amazon leases 20 Boeing 767 freighter aircraft, continues to expand delivery network,” GeekWire, March 9, 2016.)
These moves are obviously designed to take better control of its own logistics and to cut out FedEx Corporation (NYSE:FDX) and United Parcel Service, Inc. (NYSE:UPS), which are bound to eventually become Amazon’s rivals.
Amazon’s own shipping service will also help the company cut down on shipping costs, which the company takes a loss on. In 2015, shipping cost Amazon about $11.5 billion, while revenue was about $6.5 billion. (Source: “Amazon’s shipping revenue and outbound shipping costs from 2006 to 2015 (in million U.S. dollars),” Statista, last accessed March 29, 2016.)
But Amazon’s ambitions could also mean big bucks for the company. According to Robert W. Baird & Co. analyst Colin Sebastian, Amazon’s global logistic operation could become a $400-billion business. (Source: Bloomberg, op cit.)
The Bottom Line on AMZN Stock
Amazon’s Echo, cloud computing services, and shipping service are just three of the many catalysts that the company is working on to fuel future growth. All are bound to send AMZN stock in the right direction.