Ecommerce Superpower Amazon.com (NASDAQ 🙂 has rarely disappointed its loyal investors. On May 21, it reached a record high of $ 2525, thanks to the shift to online shopping during the COVID-19 pandemic.
In fact, the stock has achieved a return of around 500% over the past five years, which has performed significantly better than the benchmark index.
Trading at $ 2,460.60 at the end of yesterday, Amazon shares have gained about 35% this year. As his upward journey continues, investors have wondered if this retail giant can continue to hit new highs in the next five years? And, perhaps more importantly, is this a good time to take a stake in Amazon?
The answer depends on the company's business model and whether there are competitive threats to the broad economic canal.
E-commerce dominance
Amazon's business model positions it perfectly to expand its e-commerce dominance at a time when more and more people are online shopping. One of Amazon's strongest points is its paid membership programs, one of the largest in the world.
In exchange for an annual fee, the Prime membership program offers free, expedited shipping of various items. Members also benefit from streaming movies, TV shows and music, as well as member deals. Over time, the program has helped customers who once used Amazon only for books and movies while simply browsing the other inventory categories. Today Prime has over 150 million paid members.
While Amazon's online marketplaces generate most of the Seattle-based company, it is not the most profitable segment. Amazon is also the world's largest cloud infrastructure provider, with Amazon Web Services generating most of the profit.
AWS is a high-margin company that allows Amazon to provide cash for its market strategies, including aggressive promotions and low-cost hardware devices.
To strengthen the company's broad e-commerce competitive advantage, Chief Executive Officer Jeff Bezos is also opening a number of new growth areas beyond the low margin online sales business. Amazon's digital advertising company, another high-margin company, is expanding by a triple figure.
Backed by these highly profitable units, Amazon has been able to disrupt a whole range of industries and continue to do so for a long time.
The company also has a hardware unit that produces a growing range of smart speakers and gadgets for video streaming. The Amazon Studios division creates original television shows and movies and is starting to challenge Netflix (NASDAQ 🙂 and HBO (NYSE :).
In the physical retail space, Amazon has not kept its ambitions a secret. It acquired grocery supplier Whole Foods Market in 2017 and is now building a fleet of cashier-free convenience stores.
According to Barclays analysts, Amazon is still one of the smartest bets for investors, even after the robust performance so far in 2020. "Equities always feel a little crowded, but in the current environment we would rather own AMZN than so just about everything, "the note said.
Risks to Growth
No investment is without risks, and that includes Amazon. Despite its great track record of conquering new markets and then becoming a leading player in each of these markets, Amazon now encounters traditional retailers who are fighting back quickly, expanding their e-commerce opportunities and leveraging their massive physical presence to their advantage .
Both Walmart (NYSE 🙂 and Target (NYSE 🙂 are showing strong growth in e-commerce – about 30-40% each year – as their stores become fulfillment centers, enabling same-day delivery and curbs picking -ups.
On the cloud computing side, Amazon faces stiff competition from Microsoft (NASDAQ :), whose Azure cloud company is growing fast. Between the fourth quarters of 2018 and 2019, Azure's market share increased from 14.9% to 17.6%, according to Canalys. In the same period, AWS's share fell from 33.4% to 32.4%.
In the most recent quarters, Azure revenues grew by 62% annually; AWS sales increased by 34%. Amazon also lost the coveted JEDI cloud contract from the Pentagon, which went to Microsoft. It is worth up to $ 10 billion in the next 10 years.
While these risks are not insignificant, it is difficult to find an analyst who recommends selling the stock. Of the 47 covering the shares, 43 have buying advice on Amazon, while the rest recommend with an average price target of $ 2,675.96 over the next 12 months.
Bottom Line
It is a mystery where Amazon shares will trade for the next five years. Still, it's not hard to see that it will be difficult to challenge Amazon's leading position in many of the areas in which it operates. That suggests that the long-term buy-and-hold investor stock is one of the safest bets in the tech sector, likely with a significant increase.
