Amazon is still a growth stock if we know where to look

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On any given day, we can find headlines predicting the market’s decline or massive gains. Investors are starting to see Jerome Powell’s picture in his sleep. These are primarily intended to attract attention and are of little use to long-term investors. The last article discussed the need for focused goals and a cool head to maximize long-term gains.

But Seeking Alpha does things differently, which makes it valuable and unique. Contributors bring fresh ideas and unbiased assessments from the ground up. And different perspectives make the market… well… a market!

Amazon is under fire – and for good reason

Amazon (NASDAQ:AMZN) has drawn praise and criticism for decades, which is heating up again. Some have gone so far as to say that this is no longer a growth stock and that its best days are behind it. But what do the numbers say?

To be clear, Amazon stocks are not mine supreme conviction picks or almost the largest participation – but it’s in the top ten.

Amazon has faced relentless headwinds for the past two years, and forecasting its long-term demise during that time seems shortsighted. These headwinds include:

• Costs in the billions due to massive labor shortages;
• Logistical bottlenecks eat into profits;
• Record inflation and consumer sentiment bottoms;
• Skyrocketing CAPEX spend to keep up with growth;
• foreign exchange losses, a rushing recession;
• and on and on.

From that perspective, it seems a significant achievement that the company was able to grow revenue by 9% in 2022 (13% at constant exchange rates).

We’re here to talk growth, so let’s get down to business.

The top line

Amazon’s sales have been significantly boosted by the pandemic and cloud rush. Revenue has grown 83% since 2019 – more than:

• Google parent Alphabet (GOOG)(GOOGL) at 75%;
• Microsoft (MSFT) at 58% (FY2019 to FY2022);
• Apple (AAPL), Meta (META), Netflix (NFLX) and many more.

AWS

Amazon Web Services (AWS) has been the company’s crown jewel of late; however, this sector is also facing headwinds.

Businesses are cutting back on IT spending in anticipation of a recession. Still, the overall market is expected to double over the next five years, and Amazon owns 34% of it.

AWS growth slowed to 20% in Q4, but a quarter amid recession planning isn’t a long-term trend.

Data source: Amazon. Chart by Author.

We’ve been spoiled by the 2021 bounce as companies benefited from economic stimulus, but this segment isn’t in a long-term decline. A conservative 15% compound annual growth rate (slightly lower than expected global market growth) would double sales in five years and yield $32 billion in operating income, based on a conservative 20% margin.

Advertising

Businesses in today’s economy need to maximize advertising effectiveness. Wasteful bulk advertising is on the decline and targeted advertising is on the rise. That’s why I am extremely bullish on The Trade Desk (TTD) and Google. Amazon ads are no different. Advertisers use these commercials to directly reach consumers who are ready to buy.

Amazon didn’t even report advertising results separately through 2021. In 2022, they reached $38 billion in sales, or 7% of total sales, as shown below.

Data source: Amazon. Chart by Author.

And unlike retail sales, these have much higher margins.

Amazon Prime meets Buying with Prime

Subscription services thrive as customers see the value in Prime services. Initiatives like the broadcast of Thursday Night Football and the new Buy with Prime should continue to drive signups. Amazon reported more than 200 million Prime members in 2021, which is much higher now. If you divide 2022 revenue of $35 billion by subscription price, the number even tops 250 million.

Buying with Prime could be the next massive area of ​​growth.

Amazon.

Amazon is getting into the third-party logistics (3PL) game and could make a splash considering its size. Buy with Prime allows retailers to place a Buy with Prime button (see above) on their website that allows customers to purchase their goods through Amazon’s network.

Customers can use their Prime payment methods and get free two-day shipping and easy returns. Retailers retain Amazon branding and let Amazon’s logistics network take care of receiving, warehousing and shipping.

Retailers pay Amazon fees for these services. Keep in mind that many of these retailers are already paying for other 3PL providers. Given its logistical efficiency, Amazon should be price competitive.

Amazon just opened Buy with Prime to any interested retailer on January 31st and the potential market here is huge.

Buying with Prime will not only generate revenue but also boost Prime subscriptions.

growth in the right places

What is a mistake for slowing growth is a transformation from a product-based to a service-based structure. Sales of low-margin products are slowing and Amazon is growing where it matters, as shown below.

Data source: Amazon. Chart by Author.

Physical and online retail accounted for 56% of sales in 2019, but only 46% in 2022. This is extremely telling for the future and would have been even more pronounced had it not been for the massive pandemic surge in retail sales. Amazon isn’t just an e-commerce retailer.

Meanwhile, Amazon stock is still trading as it was in 2019. This offers long-term investors a favorable risk/reward ratio.

Shareholders are likely to see more turbulence in the near term as the headwinds aren’t over yet. But Amazon’s transformation is well underway, and its long-term gains could be terrific.

Source: seekingalpha.com