Company / Analytics

Analytics, 09 July 2020

Amazon: is this the time to buy or it's too late?

Amazon is one of the biggest gainers from the pandemic. Amazon stock topped the $3,000 mark for the first time on Monday as big tech stocks continued to soar and has since maintained that level. But how high can this stock go?

Though its future outlook remains positive, the Amazon stock may not fully reflect the sustainability of accelerating growth in the latter half of 2020 and beyond. Moreover, while Amazon has benefited greatly from the pandemic, it could also be what causes its slowdown, as the pandemic has forced its competitors to bolster their offerings. Most analysts expect further growth, even as others predict a stronger pullback.

The situation

Major technology stocks continue to reap from the Covid-19 pandemic, leading to the market’s stunning rebound from its March lows on expectations of strong sales and earnings growth — even though the US economy is now in a pandemic-induced recession and the world emerges from lockdown.

Amazon benefitted from a huge increase in online shopping during the coronavirus pandemic when brick-and-mortar stores either closed or faced long lines due to restrictions to combat Covid-19. It’s been particularly well suited for times like this: it’s easy to order from and a customer usually – despite some recent supply glitches – gets their goods quickly, with no-contact delivery.

Amazon has gained 63% year-to-date basis, compared with the industry’s rally of 42.7%. Amazon is now worth more than $1.5 trillion, joining Apple and Microsoft at the more than $1.5 trillion market capitalization level and the race to be the $2 trillion level.

Second-quarter revenue is expected to outperform estimates, with positive growth across all Amazon businesses – online stores, advertising, and Amazon Web Services (AWS). In the company’s most recently reported quarter, AWS contributed over $10.2 billion to the company’s total net sales of almost $75.5 billion. As a business unit, AWS’s growth outpaced that of torrid North American retail sales, growing at a year-over-year pace of almost 33% against the latter’s 29%. Wall Street estimates that Amazon’s total Q2 2020 revenue will top $80.8 billion, and some analysts project $85.2 billion.

The company’s growth is driven by its aggressive retail initiatives and strategic plan, which includes opening new fulfillment centers and hiring manpower to meet growing customer demand. Amazon also seems to have stabilized its logistics operations and gained share in multiple “essentials” product categories.

These strategies will continue to aid the company’s dominance in the highly competitive e-commerce market. Meanwhile, after facing criticism for employee safety and pay, Amazon said this week it will give out more than $500 million as a “Thank You bonus” to frontline workers who were with the company throughout June.

How the stock moved?

As at the time of writing on Wednesday, the stock was still above the $3,000 mark, trading at $3054.06, a level it has maintained since 06 July. Some analysts foresee a stronger pullback, claiming that an upside target of a bullish price pattern has been achieved and that a technical correction back towards the $2,600 level may take place.

But overall, most analysts maintain a buy rating for Amazon, with analysts at Baird raising their price target on Amazon to $3,300 from $2,750 on Tuesday morning.

Bottom line

Amazon has a positive future outlook, and the company’s prospects are still not completely priced in. E-commerce checks through June and positive Amazon-specific data suggest stronger prospects for the company’s core Online Retail, Advertising, and AWS revenues.

The trend in strong online spending is expected to continue, even as local stores reopen in many regions. It’s also expected that those who have shifted to online shopping during the pandemic will develop the ‘sticky’ habit of online shopping even post-pandemic, as it’s going to be inconvenient or impossible for many of them to go back to brick-and-mortar stores to obtain necessary goods; Amazon is likely to remain a default alternative for them to turn to.

Nevertheless, the Amazon stock may not fully reflect the sustainability of the accelerating growth in the back half of this year and beyond. Though Amazon has benefited greatly from the pandemic, it could also be what causes its slowdown, as the pandemic has forced its competitors to bolster their offerings – in e-commerce, digital streaming, and cloud computing. It’s no doubt that Amazon still has the lead in e-commerce, but others are investing heavily in a piece of the pie.

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