Why Amazon.com Is a Retail Disrupter
Amazon.com, Inc. (NASDAQ:AMZN) got slammed after reporting a shortfall in its fourth-quarter sales and offering a below-consensus first-quarter sales guidance.
While the sales concerns are justified, especially given that AMZN stock has risen 58% over the past 52 weeks, I view major share price weakness as an opportunity.
AMZN stock trades at 55 times its 2017 earnings per share (EPS) and 22 times its book value, both indicating that major growth is discounted into the share price, so it should not be a surprise that the stock lost some ground. In reality, many traders probably hoped for a bigger decline than the 3.5% move.
The thing is, the bullish story remains intact at Amazon.com, which has proved to be a major disrupter to the way retailers sell goods.
We are seeing the major retailers adopt a more positive tone to building their online presence in an effort to fend off Amazon.com.
Take the case of retail heavyweight Wal-Mart Stores Inc (NYSE:WMT). The king of the brick-and-mortar retail space has been facing tough competition from the online space, and specifically from Amazon.com.
To set up an offensive front, Wal-Mart recently announced it would be offering free two-day shipping via online sales, which is identical to Amazon.com’s service, but Wal-Mart doesn’t require shoppers to have a paid membership.
My Bull Case for AMZN Stock
Wal-Mart’s move could force Amazon.com to tinker with its pricing strategy, but the reality is that Amazon has a big advantage in that its shoppers have access to hundreds of thousands of retailers from around the world.
In 2016, Amazon.com reported that it had delivered over two billion units for sellers while the number of active sellers surged in excess of 70%. In all, sales were shipped to shoppers in 185 countries from sellers in over 130 countries. (Source: “Amazon.com Announces Fourth Quarter Sales up 22% to $43.7 Billion,” Amazon.com, Inc., February 2, 2017.)
The numbers reflect the global reach of Amazon.com that makes it a truly global retail powerhouse that will be hard to defend against.
In addition, AMZN stock will benefit from the growing adoption of the company’s “Amazon Web Services” (AWS) cloud business that witnessed year-over-year growth of 47%, to $3.5 billion in 2016.
A look at the yearly chart of Amazon stock shows the impressive upward trend that has been firmly in place since 2009.
Note that AMZN stock has consistently held at above the 50-day moving average without the stock ever testing this key moving average on any occasion.
On the multiple instances that AMZN stock saw some selling, as indicated by the circles on the chart below, the stock managed to hold at above the 50-day moving average and stage a subsequent rally. I expect the same to occur this time.
Chart courtesy of StockCharts.com
The bottom line is that you have to think long-term with Amazon stock. While some investors are running to the exits, I would be looking at the sale in AMZN stock as a potential opportunity.