Amazon.com, Inc. is the biggest online retailer on the planet, and its shares are consistently monitored among Wall Street investors. From its early beginnings, Amazon has evolved into a technological powerhouse, outpaced in value only by a select group of corporations. They operate both domestically and internationally, retailing a variety of consumer goods. Amazon’s shares are intriguing. Despite reporting profits that are typically barely above the breakeven point, it’s stock price has consistently trended upward. Critics have speculated that the company may be within some form of economic bubble destined to burst. Yet, Amazon continues to thrive and innovate, with investors expressing unwavering confidence in the company’s stock. So do you hang on to your Amazon shares?
Looking back at Q4 2015, Amazon released earnings report fell somewhat short of Wall Street’s high expectations. The report showed Amazon’s earnings at $1.00 per share against a projected $1.56. The shortfall was primarily due to higher fulfillment and shipping costs. Worldwide revenues climbed 22% to reach $35.7 billion or 26% without considering currency exchange fluctuations. Even so, this figure failed to meet the set consensus estimates of $35.93 billion. Amazon’s worldwide active customer accounts approximated 304 million. When customers who made free orders in the preceding 12 months were excluded, active customer accounts were approximately 280 million, a 26% growth from the previous year. Paid Prime memberships increased 51% y/y, while worldwide active Amazon web services users exceeded 1 million. Amazon Web Services (AWS) sales were at $2.405 billion in Q4 2015 as compared to $1.42 billion in Q4 2014. AWS continues to post extraordinary growth margins, indicating it’ll remain crucial for the company’s future.
2015 was an exceptional year for Amazon, noting profits for three consecutive quarters. The shares also more than doubled to nearly $700 each before settling back down to levels below $600. This has understandably concerned investors who are eager to safeguard their realized gains. A major concern is the company’s trailing P/E (price earnings) of 850 which suggests that the stock is significantly overpriced. While future P/E looks better at 105, it’s still relatively high compared to an estimated annual growth rate of 60% over the next 5 years. But technology companies are known to challenge traditional accounting and mathematical concepts. Hence, it’s essential to consider the underlying fundamentals of the company’s business. Websites like investing in stocks can provide valuable guidance on how to effectively use stocks when investing in companies like Amazon.
With Amazon primarily operating in retail, it’s experienced a decline in stock, however, the company itself and the retail industry remain unaffected. As a trend, offline businesses are increasingly offering their products online. Despite a drop in sales from mega offline retailers like Wal-Mart and Kmart, Amazon reported sales revenues over $100 billion in 2015. The National Retail Federation noted that online shoppers surpassed in-store shoppers during the Black Friday event in the United States. If this trend continues or accelerates, Amazon is sure to benefit.
Amazon Prime, with a membership increase of 51% last year, is seen as crucial to the company’s future. While the exact membership figures of this service are not publicly available, it’s estimated to have nearly 80 million subscribers worldwide. The subscription offers customers a range of free services for an annual fee of $99.99. Amazon Prime could enhance customer loyalty, as consistent members tend to spend more. A recent survey indicated that 49% of first-year Prime members and 68% of year-four subscribers spend over $800 each year on Amazon. In 2015, Amazon added 3 million new Amazon Prime members worldwide in the third week of December alone. Further, it shipped over 200 million more items for free to Prime members as compared to the previous year.
The Amazon Web Services (AWS) sector continues to record high profit margins. In Q4 2015, which marked the fourth quarter that Amazon reported the numbers, AWS recorded profits of $687 million on sales of $2.4 billion. AWS, the recognized leader in cloud computing services, leases computer power, data storage space, networking, etc., to clients. It’s expected to be a significant contributor to Amazon’s revenue, with the industry projected to grow from $49 billion in 2015 to $67 billion in 2017.
Despite weaker-than-expected Q4 earnings, many analysts are still bullish on the company. JPMorgan, S&P Capital IQ, and Bank of America Merrill Lynch are among those who have maintained a positive outlook.
Given that Amazon is a dominant force in consumer ecommerce and cloud computing, holding on to your Amazon stocks and waiting for the next boom cycle might be sensible. However, for short-term investors, other profitable opportunities in financial markets such as binary options trading could offer high returns trading the Amazon stock price, irrespective of the price direction.
