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Why Amazon Can Have A Bright Future

By Andrey SergeenkovStock MarketsApr 10, 2019 11:36AM ET
Why Amazon Can Have A Bright Future
By Andrey Sergeenkov   |  Apr 10, 2019 11:36AM ET
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This year, the world's largest e-commerce company, (NASDAQ:AMZN), continued its upward trajectory, ignoring the expectations of a correction due to overbought stocks. We highlight the competitive strength of the company and its various sources of income as powerful drivers for further sustainable growth despite its growing shareholder value.

Since the beginning of the year, Amazon shares have added about 23%. This after gaining more than 25% in value last year. Moreover, the company's current positive momentum suggests that there are no short-term factors that could prevent further share growth.

A strong and steady rally during which Amazon shares rose in price by 430% over the past five years has also led to the technology giant looking quite expensive. Amazon shares are not cheap by traditional standards, and any early warning signs in the market could trigger a sharp correction.

Stock market bears noted Amazon's slowdown in sales growth last year, as well as rising operating costs and difficulties in overseas markets. The fourth quarter of 2018 was the third period in a row of slowing sales for Amazon. The growth rate for the period was only 19.7%, the lowest since 2015.

For the current quarter, Amazon predicts revenues in the range of $56-60 billion. The lower limit of the range would correspond to an increase of only 10% in annualized terms, which would be the lowest since 2001.

However, despite these factors, Amazon shares are still a solid option for long-term investment. Investing in technology companies is not without risks, especially at the late stage of a bull run, which is showing some signs of having peaked. For long-term investors, Amazon shares are still one of the best options amongst fast-growing technology companies. Here are the main reasons for optimism:

Users Are Actively Spending Their Money On E-Commerce Sites

First, Amazon shares are a recommended Buy because of the company's wide "economic moat." The most successful investor in history, Warren Buffet, coined this term. It is a characteristic which distinguishes companies with a sustainable competitive advantage, and Amazon certainly fits into this category.

Amazon is well able to protect its leading position in the e-commerce segment. According to EMarketer Inc., this year, consumers around the world will spend $484 billion on Amazon, which is 26% more than in 2018. In doing this, the Seattle-based company will account for more than half of all online spending in the United States.

New Drivers For Growth

In addition to the company's wide “economic moat,” CEO Jeff Bezos is also directing it into several new growth areas to supplement its low-margin sales of goods over the Internet.

Amazon manages the largest cloud platform in the world, serving large corporate customers. The growth rate of Amazon Web Services is higher than 40%.

The digital advertising division is also showing triple-digit growth. Thanks to these profitable divisions, Amazon has been able to enter new markets and will be able to continue doing so for a long time.

The company also has a hardware division which produces a line of smart speakers and gadgets for streaming. The Amazon Studios division has been creating original television shows and films in direct competition with Netflix (NASDAQ:NFLX) and HBO. In addition, the company has ambitions in the traditional retail market. Amazon acquired Whole Foods Market (NASDAQ:WFM), and is expanding its network of retail stores without sales staff.

In Summary

Because of Amazon’s leading position in many areas, its shares are a safe tech sector investment. Amazon’s e-commerce division continues to grow rapidly, as do revenues from AWS and digital advertising. Analysts agree that Amazon will show an increase in profits of more than 40% per year over the next five years. This will be a valid reason to justify the high cost of Amazon shares.

Why Amazon Can Have A Bright Future

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Why Amazon Can Have A Bright Future

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