Here’s Why Amazon Stock Could Be a Winning Pick
If you have been following the stock market at all, you will likely have noticed one phenomenon: the market does not like companies that rely on one-time sales, even if they are leaders in their respective markets. Instead, investors prefer those that have repeat businesses, with Amazon.com, Inc. (NASDAQ:AMZN) stock being their favorite.
At $671.32 per share, Amazon stock is trading at more than 500 times its earnings. Its forward price-to-earning (P/E) ratio is almost at 70X, not a low number even in today’s bloated market. But Amazon does have a special trick that keeps investors upbeat about the company.
Let me explain…
In today’s market, it’s not enough to just make a good product that people buy and use one time. As we have seen recently, you can be the No. 1 action camera maker in the world and investors would still short your company’s shares like there is no tomorrow. Don’t think it’s possible? Just take a look at GoPro Inc’s (NASDAQ:GPRO) stock chart.
What investors like are companies that consumers go back to more often than just on product launch dates.
For instance, some of those companies that report monthly active users (MAUs) or subscriber numbers saw their shares soaring through the roof last year. And the reason is simple: Facebook users are going to log in to check their friends’ status updates quite often, while Netflix subscribers will go back to stream the latest episodes of Narcos and House of Cards. Repeat engagement implies continued success in the future.
Once customers discovered the breadth of products available on Amazon.com, they were already making repeat purchases on the e-commerce platform. Yet the company still felt the need to launch perhaps the most ingenious product to attract repeat businesses of all time—the “Amazon Prime” membership.
By being a Prime member, consumers get free unlimited two-day shipping on millions of goods in the U.S. The company even offers free same-day delivery to certain metro areas. And that’s not all. Prime members also get access to Amazon’s on-demand video streaming business complete with award-winning shows. At $99.00 per year, the value offered by Amazon Prime is hard to beat.
The best part is that Prime members have brought a lot more business to Amazon. A survey showed that 74% of Prime members used Amazon more than when they first joined Prime. To be more specific, 49% of Prime members spend more than $800.00 annually on Amazon, while the share is only 16% for non-Prime users. (Source: “These Numbers Explain Why Amazon Wants to Give So Much Free Stuff to Prime Members,” Business Insider, October 20, 2015.)
The increasing business brought by Amazon Prime means more orders to fill. The company relies on third-party carriers like United Parcel Service, Inc. (NYSE:UPS) and FedEx Corporation (NYSE:FDX). But lately it has also been building its own fleet.
In March, Amazon confirmed that it had signed a deal to lease 20 Boeing “767” wide-body freighter jets. The company also bought thousands of truck trailers and started using contract drivers to deliver fast orders. (Source: “Amazon to Start Air Delivery Network with Leasing Deal,” Reuters, March 9, 2016.)
The company’s effort to boost its logistics network earned praise from analysts. For instance, Cloin Sebastian from Robert W. Baird & Co. considers these steps “almost a necessity to continue the rapid expansion of Prime and Prime Now.” (Source: “Analyst Bullish on Amazon.com, Inc. (AMZN) and Zynga Inc (ZNGA) Following New Contract and Earnings,” Smarter Analyst, May 5, 2016.)
In particular, Sebastian said, “Given that Amazon spent about $11.5B on shipping in 2015, even a slight improvement in per-unit economics could provide a notable boost to the company’s margin profile.” (Source: Ibid.)
Sebastian maintained an “Outperform” rating on Amazon stock with a $780.00 price target. That’s over $100.00 more than AMZN stock’s current price.
The Bottom Line on AMZN Stock
Still, the company is not cheap. Its high valuations could mean that Amazon stock’s path may not be smooth sailing from now on. But after taking a look at what the company has built—a business empire that embraces all aspects of consumers’ lives—you don’t want to bet against AMZN stock either.