Now a literal household name, Amazon (AMZN - Free Report) has experienced meteoric growth since its May 1997 IPO, since which its stock price has soared an astounding 111,260%. This represents about hundred times more growth than any of its industry competitors over that same time frame. This year alone, Amazon is up nearly 43% compared to an industry average of 9.2%.
With this much growth already baked into its stock price, many investors may feel that Amazon stock is too expensive and that they have missed their chance to cash in. Is this truly the case? Let’s take a look.
An Ever-Expanding Sphere of Influence
Our team reported on Thursday that shares of pharmacy giants CVS (CVS - Free Report) , Rite Aid (RAD - Free Report) , and Walgreens Boots Alliance (WBA - Free Report) plummeted on news that Amazon would purchase online pharmacy delivery startup PillPack. The move is part of the firm’s push into the $400 billion industry. While specific details have not yet been released, the idea is that the firm would sell prescription medicines online.
This isn’t Amazon’s first foray into healthcare. The company announced in January that it, alongside Berkshire Hathaway (BRK.B - Free Report) and JPMorgan Chase (JPM - Free Report) , would begin “partnering on ways to address healthcare for their U.S. employees, with the aim of improving employee satisfaction and reducing costs.” The partnership will see the formation of an independent company, at which a top-level executive from each respective firm will take lead.
Amazon also announced Delivery Service Partners on Thursday, a new program that is designed to let local entrepreneurs manage and operate delivery networks with up to 40 vans within their respective regions. The move puts firms like UPS (UPS - Free Report) and FedEx (FDX - Free Report) directly in their crosshairs. It said that the move would involve “hundreds” of small businesses and ultimately result in the hiring of “tens of thousands” of delivery drivers across the country.
This week, Amazon began rolling out special deals for its Prime members to Whole Foods, which it acquired in August of last year. According to RBC Capital Markets analyst Mark Mahaney, this could double Whole Foods’ customer base. Amazon is also expanding Go, its cashier-free convenience store initiative which made its public debut in January of last year.
Amazon’s sphere of influence is only continuing to expand. It is difficult to fathom that the same firm which at one point only sold books, now has a presence in retail, logistics, media production, artificial intelligence and cloud computing, just to name a few of its numerous ventures. What makes the company interesting is the fact that it continues to invest and expand into new territory, just as its recent news announcements have shown us.
By the Numbers
Amazon had a stellar earnings report in April, delivering first-quarter 2018 earnings of $3.27 per share, crushing the Zacks Consensus Estimate by $2.05 (168%) and representing 121% year-over-year growth. The company also reported $51.04 billion in revenue, beating our Consensus Estimate by almost a billion dollars and representing 43% in year-over-year growth.
Product sales, which account for 61.9% of Amazon’s overall sales, increased 33.2% year-over-year to $31.61 billion, while service sales (which account for the other 38.1%) rose 62.2% year-over-year to $19.44 billion. This was driven largely by Amazon’s physical store presence through Whole Foods and Amazon Go. Physical store sales accounted for $7.46 billion in revenue compared to our $4.35 billion Consensus Estimate.
The strong earnings report was also guided in part by strong performance in Amazon’s Web Services division (AWS), which saw revenues climb 48.6% year-over-year to $5.44 billion. The change was primarily driven by an expanding customer base, which included the addition of enterprise customers such as LG Electronics and Shutterfly (SFLY - Free Report) . AWS now accounts for ~11% of Amazon’s total revenue and ~73% of its operating income, and holds a third of the global cloud computing services market.
Investors should take note of Amazon’s 12-Month Forward P/E ratio of 101x, which is notably lower than its F1 2018 ratio of 130.4x. The ratio shifted dramatically in April, as analysts significantly raised their estimates on the back of the firm’s extremely strong earnings report.
Investors may also notice that the aforementioned 12-Month Forward P/E of 101x still appears to hold a significant premium to the industry average of 23.7x. The reason why this is the case however, is because Amazon sacrifices profits in the short-term to fund its many different initiatives. This reduces earnings and thus inflates the ratio. This aggressive investment strategy is what has allowed Amazon to grow in such an explosive fashion. One good example is AWS, which was not immediately profitable as the firm created its infrastructure, but now represents one of its most lucrative divisions.
The effects of Amazon’s investment strategy become clear when we look at the last five years of Amazon’s earnings estimate history, represented by the green line:
Note that although earnings estimates for F1 2018 sat at $8.69 per share before April’s report, they currently sit at $12.74 per share. That Amazon’s estimates have continuously increased is a testament to analyst confidence that its various initiatives have not only already brought in results but will continue to do so.
Here is another point that investors may find interesting:
Although Amazon is burning through cash to fuel their operations, it has been increasing its margins consistently for the last six years. This is important because it tells us that Amazon is becoming more efficient at converting sales into actual profit. Once Amazon’s newer investments turn profitable, it will mean that Amazon can potentially continue to pull off earnings surprises as significant as last quarter’s 168% beat.
Although investors may feel hesitant about Amazon’s current stock price, various signs point to it being warranted rather than overhyped. With a perpetually growing product portfolio, aggressive operations investment, and increasing margins, Amazon is positioning itself to dominate multiple industries at once for years to come.
While nothing is certain, investors should remain aware of the possibility that should they attempt to wait for a better entry point to invest, it may never come. Regardless of if investors choose to purchase Amazon stock, they should continue to monitor its performance. As its various divisions continue to grow, an increasing number of firms will see their business models threatened.
Amazon currently sits at a Zacks Rank #3 (Hold).
5 Medical Stocks to Buy Now
Zacks names 5 companies poised to ride a medical breakthrough that is targeting cures for leukemia, AIDS, muscular dystrophy, hemophilia, and other conditions.
New products in this field are already generating substantial revenue and even more wondrous treatments are in the pipeline. Early investors could realize exceptional profits.
Click here to see the 5 stocks >>