5 Reasons to Invest in Amazon and Buy Amazon Shares

With a year-to-date return of 7%, Amazon stock is underperforming the markets. However, it is the third best-performing FAANG (Facebook, Amazon, Apple, Netflix, and Google-parent Alphabet) stock in 2021. The recent underperformance could be an opportunity to buy Amazon stock.

Amazon is currently the third-largest company globally with a market capitalization of $1.76 trillion. Apple is the largest company followed by Microsoft.

Here are 5 reasons why Amazon is a good buy at current prices.

1. The Increased Pace of Digitization

The pace of digitization has increased due to the COVID-19 pandemic. A lot of consumers who were not comfortable with online shopping have also pivoted to buying goods online. While some of the consumer buying will revert back to brick-and-mortar stores, many consumers might stick to the e-commerce platforms given the ease, better prices, and availability of more buying choices.

While the company’s growth is expected to come down in 2021 from the 2020 highs, it is nonetheless expected to grow at high rates for the near foreseeable future. Analysts expect Amazon’s revenues to rise 27% in 2020 and 18% in 2022. The forecast for 2022 could be conservative and analysts might upwardly revise their forecast.

Amazon is also expected to see earnings rebound in 2021 and beyond. Last year, it was spending billions of dollars every quarter towards COVID-19 related costs. However, these costs will fall now and help lift the company’s earnings.

2. AWS

While we generally know Amazon as an e-commerce company, it also has cloud operations with its AWS (Amazon Web Services). The company is the market leader in the cloud market. AWS is growing fast and is the most profitable business segment for Amazon. It reported an operating income of $4.1 billion in the first quarter of 2021 which was over 46% of the total operating income.

AWS is the proverbial cash cow for the company and it has been using cash from the business to invest in other businesses especially international expansion.

3. International market expansion

In the first quarter of 2021, Amazon’s international operations turned profitable. While the e-commerce market in North America, which is Amazon’s largest segment by revenues, has been profitable, the company has been burning a lot of cash in international markets. If the international markets also turn profitable on a sustainable basis, it will help propel the company’s earnings.

Amazon is a growth company despite its market capitalization reaching almost $2 trillion and quarterly revenues in excess of $100 billion. While a lot of growth names are making losses, Amazon is a sustainably profitable company.

4. Amazon Ecosystem

Amazon is not only an e-commerce platform but a complete ecosystem. The company has services like Prime which add to customer stickiness on the platform. Also, it is a play on the massive amount of user data that it has which it can use to show relevant products. There is also the network effect as the availability of wider choices on the platform acts as a competitive advantage and builds high barriers of entry. The company has built a strong moat with its ecosystem which is impeccable.

Along with the domestic markets, Amazon also allows users to buy products internationally. The company’s customer service is also a USP even as there would be the odd event of a buyer not happy with the services. The complete ecosystem that AMZN has built is hard to replicate easily. For many people across the globe, Amazon and e-commerce are synonymous, just like internet browsing and googling are used interchangeably.

5. Amazon stock trades at an attractive valuation

AMZN stock trades at an NTM (next-12 months) PE multiple of 60.7x. The multiple has averaged 84x, 80x, and 104x over the last one year, three years, and five years respectively. The stock’s current valuation multiples are near historical lows. The massive valuation discount over long-term multiples looks unwarranted and AMZN stock looks attractive at these prices.

Technical Analysis

Amazon stock has crossed above its 50-day SMA (simple moving average) and 100-day SMA which is a bullish indicator. However, it looks overbought now with a 14-day RSI (relative strength index) of 71.7.

Meanwhile, this week, we could see volatility in AMZN stock as US lawmakers discuss five antitrust bills. AMZN has been accused of using its powers to stifle competition. The company is also accused of having an unfair advantage over small sellers in the marketplace.

Wall Street is bullish on Amazon stock too

Amazon stock has a median target price of $4,225 which is a premium of 21.2% over current prices. Of the 49 analysts covering the stock, 48 rates them as a buy or some equivalent while one analyst has a hold rating. None of the analysts has a sell rating on AMZN stock.

Earlier this month, Jeffries termed AMZN stock a “Franchise Pick” and assigned a target price of $4,200. JPMorgan Chase also reiterated its overweight rating and a $4,600 target price on the stock.

Overall, AMZN stock could be a part of the core portfolio. The stock also forms part of Berkshire Hathaway’s portfolio even as it wasn’t Warren Buffett but a different investment manager who made the purchase. On his part, Buffett has admitted to missing out on Amazon stock. While Amazon stock is trading near its all-time highs, it is never too late to buy quality names like AMZN especially when they are trading at a discount to their historical valuations.

Ready to begin investing in Amazon and buy Amazon shares?