At an All-Time High, Is Amazon Still a Buy?

The e-commerce giant just hit a new record. Is it too late to hop on the train?

Feb. 22, 2020

This article was originally written by Jeremy Bowman of The Motley Fool

It’s only February and 2020 is already shaping up to be a banner year for Amazon (NASDAQ:AMZN).

The tech giant’s stock is up 15% year-to-date, well ahead of the 4.5% gains that the S&P 500 has posted. Amazon blew away estimates in its fourth-quarter earnings report, and the stock has continued to climb since. On Feb. 11, the stock hit an all-time high at $2185.95. Before the recent rally, its last all-time high had come in September 2018 at $2,050.

With the stock at a new record high and its valuation north of $1 trillion, investors may be wondering if the stock is still worth buying. Let’s take a look at a few reasons why Amazon could keep going higher from here.

Excellent execution

Amazon’s fourth-quarter earnings report wowed the market for a number of reasons. Not only did the company beat estimates on both sales and profits, it grew its bottom line despite rolling out one-day Prime delivery, which it had estimated would add $1.5 billion in incremental shipping costs. The benefits of one-day shipping were clear. It would lead to increased customer satisfaction, and help Amazon put space between itself and rivals like Walmart (NYSE:WMT) and Target, which had begun to offer free two-day shipping. It also helped drive its Prime membership up to 150 million from 100 million just 19 months before, therefore adding to the flywheel effect from its loyalty program.

However, one-day delivery was supposed to come at a significant cost. While North American e-commerce operating income did fall 18% to $1.9 billion in the quarter, and shipping costs jumped 43% to $12.9 billion, growth in its cloud computing division, Amazon Web Services, was able to counteract the slimmer profits in e-commerce and overall profits grew from $6.04 per share to $6.47 per share.

Wall Street seems to keep underestimating Amazon’s profit potential, and businesses like advertising, its third-marketplace, and AWS should ensure that that profitability expands over the long run as initiatives like one-day delivery drive top-line growth and expand the company’s competitive advantages.

The valuation ceiling keeps getting higher

For a time in 2019, Amazon was the most valuable company in the world, topping its tech rivals like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Alphabet.

However, both Apple and Microsoft have rallied over the last year and now have valuations topping $1.4 trillion. That likely gives investors more appetite to support Amazon’s expanding valuation, which has reached $1.06 trillion, as it still has a ways to go to catch its peers.

While Apple and Microsoft are both significantly more profitable than Amazon, the e-commerce giant has greater potential to grow its profits through high-margin businesses like advertising and AWS and by leveraging its advantages with its network of fulfillment centers and now one-day delivery. 

Today, investors wouldn’t balk at $1.5 trillion valuation the way they might have a year ago. If Amazon keeps executing, there’s no reason why the stock can’t reach that milestone.

Favorable catalysts 

Finally, Amazon also seems to be gaining a wider advantage against competitors. Walmart’s recent decision to pull the plug on Jetblack, a personal concierge service where customers ordered by text, is a reminder that the retail giant has struggled to match Amazon in core e-commerce services, even as it’s grown its online grocery business rapidly. Walmart has also taken a pause on its strategy of acquiring digitally native brands like Bonobos, a sign it’s becoming less aggressive with its e-commerce plans.

Meanwhile, in cloud computing, Amazon just won a court victory over Microsoft in its fight for the Pentagon’s $10 billion JEDI contract as a judge ordered Microsoft to stop all work on the project until Amazon’s legal challenge was resolved. Amazon had been initially favored to win the contract, so the judge’s decision could be a step in that direction.  

Elsewhere, Amazon has cleverly positioned itself on the forefront of several emerging growth industries. E-commerce and cloud computing are the most apparent ones, but the company has also carved leading positions in areas like voice-activated technology with Alexa and Connected TV with its Fire TV devices. Experiments like Amazon Care, its tech-supported healthcare pilot, also have the potential to deliver huge returns down the road. 

That all adds up to a set of favorable tailwinds that give the company sizable competitive advantages and long-term growth potential, as the areas it competes in are seeing rapid growth.   

With its high valuation, Amazon is still vulnerable to a pullback, especially if the broader market slides, but at an all-time high following a blowout earnings report, the stock still looks like a buy.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in BlackLine. Read our full disclosure policy here.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman owns shares of Amazon and Target. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.