Amazon Stock Set to Climb Higher in 2017?
Amazon.com, Inc. (NASDAQ:AMZN) stock has been at the center of attention since Donald Trump won the presidential election last fall.
A bone of contention was that The Washington Post, which is indirectly owned by Amazon CEO Jeff Bezos, was accused by Trump of writing false articles about him. AMZN stock was hit hard on the negative sentiments. However, things seem to be looking up after Trump invited Bezos to his tech meet.
So where do we expect Amazon stock to be in 2017?
The Amazon stock price is way off of its October 2016 highs of around $844.00, but it is gradually inching up. In the third-quarter results announced in October 2016, Amazon.com, Inc. shocked everyone when it did not meet the earnings estimates. The reasons were increased shipping costs and increased investments in product development and operations. The retail giant is investing big-time in logistics and fulfillment centers to meet increased demand.
Although the competition is immense in all the markets that the company competes in, there are distinct advantages that would be difficult for anyone to match. Amazon.com, Inc. is a good story for the long term. Given the sheer size of its target markets and the fact that the company does not account for a large portion of the retail market, there is still a lot of room for Amazon to grow.
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Here are the top two reasons to be bullish on Amazon stock in 2017.
Firstly, growth in Amazon Web Services (AWS) should buoy AMZN stock. AWS has been the silver lining for the last six quarters for Amazon.com, Inc. The company’s third-quarter results were boosted by this cloud-computing division. The sales of AWS stood at $3.23 billion, which means a growth of 55%. This business of renting computing power to various startups and other companies has turned around the outlook of the company. CEO Jeff Bezos had said that he expected AWS to reach $10.0 billion in sales this year. The potential of AWS has had a positive impact on AMZN stock.
Amazon plans to boost investments in fulfillment and AWS, which R.W. Baird analysts believe could drive “meaningful” revenue growth for the company. The analysts are bullish on the stock despite lower-than-expected 2016 Q3 earnings. The firm reiterated its “Outperform” rating and $850.00 price target on Amazon stock. (Source: “Amazon.com (AMZN) Stock Gains, Baird Bullish,” TheStreet, October 31, 2016.)
“Importantly, we view these investments as setting the stage for further meaningful revenue growth in retail, technology and media,” wrote Baird in an analyst note. “Moreover, Amazon.com continues to ramp in emerging areas of technology, including machine learning and home automation.” (Source: Ibid.)
These investments should provide a big boost to AMZN stock in the future.
Cloud computing is one area which is very important for Amazon.com, Inc., and it holds a lot of promise, as the field itself offers immense opportunities. Bezos, along with a couple of his rivals, may eventually control much of the $1.0-trillion global market for business computers and software. (Source: “Why the Computing Cloud Will Keep Growing and Growing,” The New York Times, December 25, 2016.)
That is because AWS, Amazon’s big-business computing division, is starting to affect more than just the world of computer servers, data storage, and networking at the core of computing. Increasingly, AWS is also entangled with mobile phones, sensors, and all sorts of other devices in the so-called Internet of Things (IoT).
“When has Amazon ever thought about anything other than world domination?” asked Lydia Leong, who follows cloud computing at Gartner Inc (NYSE:IT). Leong continued to say that with Amazon not being content to be only in big centralized data centers, “they want to be at the edges, whether that is a customer’s own computers or the Internet of Things.” She added that Amazon is planning to crush the costs of servers and networking, and there isn’t a part of computing that Amazon doesn’t want to touch.
Given the resources that Amazon.com, Inc. has and the scale it wants to operate in, investors are confident in the ability of AWS to be a big-money spinner for the company.
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Second, Amazon stock could gain from a competitive edge in retail business. The e-commerce business of Amazon.com, Inc. does not show any signs of slowing down, even as the company’s rivals step up their e-commerce strategies. Although the company focuses on expanding its market share, and not short-term profitability, it is a force to be reckoned with, due to the numerous competitive advantages that its traditional rivals find hard to match.
The company has been aggressive in getting more and more people hooked on its “Prime” subscription service. It has made it difficult for customers to not to go for this annual membership program, which provides numerous benefits like free shipping of various items and access to unlimited video streaming.
In its statement released in December 2016, the company said that more than one billion items were shipped worldwide with Prime and “Fulfillment by Amazon” (FBA) in the 2016 holiday season. More people around the world tried Prime that holiday season than in any previous year. (Source: “Alexa Devices Top Amazon Best-Seller List this Holiday – Millions of Alexa Devices Sold Worldwide,” Amazon.com, Inc., December 27, 2016.)
Amazon’s Prime program has been instrumental in locking customers into its services and platform. Prime has been key to building customer loyalty, and it has worked wonders for the retail strategy of the company, as well as for AMZN stock.
The e-commerce giant also got the maximum share of U.S. online spending during the 2016 holiday season, as its traditional rivals like Wal-Mart Stores, Inc. (NYSE:WMT), Target Corporation (NYSE:TGT), and Best Buy Co Inc (NYSE:BBY) resorted to various offers to lure customers to their stores.
The key theme of the 2016 holiday shopping season was that consumers shifted their purchases from brick-and-mortar stores to online in record numbers. As per research by Slice Intelligence, the lion’s share of these online purchases were going to Amazon. The company had a 36.9% share of the market. (Source: “Amazon grabbing the bulk of surging online sales this holiday,” CNBC, December 23, 2016.)
Amazon.com is not shying away from investing and experimenting with new store formats to provide a better customer experience, something that its rivals may find hard to match. The company introduced its new store format “Amazon Go” in early December 2016 and attempted something revolutionary in the grocery-buying business. Shoppers just go into the store with their Amazon Go app, select what they want, and leave the store. These stores will be opening on a larger scale in early 2017. Such experiments keep consumer interest high and are likely to benefit AMZN stock.
Amazon is also planning to open dozens of pop-up stores in U.S. shopping malls over the next year. The miniature retail storefronts are primarily designed to showcase and sell the company’s hardware devices, particularly its “Echo” home speakers. The pop-up stores reflect the company’s growing drive to reach consumers directly through a variety of access points, including storefronts, home delivery, and innovative devices. (Source: “Amazon is doubling down on retail stores with plans to have up to 100 pop-up stores in US shopping malls,” Business Insider, September 9, 2016.)
Amazon is defining the future of shopping by mixing retail and e-commerce strategies, and is getting better at it than any other rival. The move into opening physical stores is particularly significant, as the majority of retail sales still happen in stores, although online sales have been growing fast. The company wants to be in a dominating position in order to take advantage of such developments.
Amazon’s growth over the past three years has been phenomenal. AMZN stock gained about 25% as compared to the nine-percent gains posted by the S&P 500 Index.
Chart courtesy of StockCharts.com
Amazon Stock Forecast 2017
It is clear that Amazon is investing big-time for the future, and has leadership advantages in huge markets. The 2016 holiday period was the best-ever season for Amazon sales, with devices including the “Echo Dot,” the “Fire TV stick,” the “Fire Tablet,” and the Amazon Echo topping the best-sellers list.
In its press note released in December 2016, Amazon.com, Inc. said that customers purchased and gifted a record-setting number of devices from the Amazon Echo family, with sales up over nine times compared to the 2015 holiday shopping season. Millions of “Alexa” devices were sold worldwide in 2016. (Source: Amazon.com, Inc., December 27, 2016, op cit.)
Amazon stock has returned almost 15% in 2016 as compared to the broader S&P 500 Index, which posted gains of about 12%. The returns are phenomenal if we look at a time horizon of 3-5 years. Given the fact that there is so much of the market to capture, there seems to be a lot of upside potential; the outlook for AMZN stock in 2017 appears bright.
Amazon.com is set to keep growing as a dominant player in the two big growth markets of e-commerce and cloud computing. Although profitability in the short term is a concern, investments for growth are bound to bear fruit in the future and keep Amazon stock buoyant in 2017.