2020 Will Be Amazon’s Comeback Year
25 Feb 2020
- Amazon delivered a mic-drop 4Q19, which has triggered the stock to climb 15% in the past month alone.
- Despite recent performance having topped expectations by a mile, I believe Amazon’s longer-term prospects are what’s most enticing.
- While AMZN is far from being a value stock, multiples seem reasonable enough to justify owning shares at current levels.
Retail and cloud giant Amazon (AMZN) had quite a bit of catching up to do.
Until mid January 2020, the company’s stock had underperformed all conceivable benchmarks over the previous six months, in some cases by a very wide margin: The S&P 500 (SPY), the tech sector (IYW), each one of the FAAMG names – even gold (GLD), treasuries (TLT) and other commodities (DBC). A valuation haircut relative to an otherwise robust equities market was, in fact, one of the key reasons why I had chosen this stock over Apple (AAPL) as one of my top picks for 2020.
To be fair, Amazon had failed to deliver satisfactory results in the second and third quarters of last year. Therefore, share price malaise may have been properly justified. But with impressive 4Q19 results out, the company seems to have turned a page. Therefore, I believe the stock will continue to gain lost ground in the new year.
Fourth quarter mic drop
Regarding 4Q19 performance, I already had been expecting strength in e-commerce coming from a robust holiday season. Mastercard (MA) had previously reported that online shopping increased at a slightly faster pace in 2019 than it had in the fourth quarter of the previous year, despite fears of economic deceleration around August and September and that digital sales had done particularly well.
Amazon’s most recent results were strong and contrasted with a much less exciting holiday season for retail giants Walmart (WMT) and Target (TGT). For reference, the two competitors have reported 4Q19 sales that lagged expectations, while Amazon delivered its widest top-line beat since September 2017. The disparity suggests to me that Amazon has been taking wallet share away from its key peers and pulling away as the most relevant e-commerce player in its home country.
At the center of Amazon’s competitive advantage seems to be the third-party seller business, which grew YOY at an impressive 30% pace in the fourth quarter as the vendor base expands and increasingly adopts one-day delivery. In fact, across the North America retail segment, it’s hard to imagine the rollout of Prime One Day in the back half of last year not having had a substantial impact on 4Q19 sales.
Staying focused on the long term
Despite recent performance having topped expectations by a mile, I believe Amazon’s longer-term prospects are what’s most enticing. I have argued recently that the Seattle-based company is undergoing a metamorphosis to a subscription-like business model that should enable the company to deliver more consistent and predictable financial results. AWS, Prime memberships and streaming services are the more obvious growth categories. But even on the retail side, initiatives like Subscribe & Save are likely to help boost recurring revenues and keep customers loyal to the platform.
It’s true that AMZN’s valuation finally started to climb again (see chart below) after a 2019 marked largely by lack of share price momentum. A better time in the recent past to buy the stock would have been in early January (i.e. about 15% ago) when I pointed out that AMZN was “finally starting to look like a reasonably-priced stock” given the company’s strong fundamentals.
Still, I don’t believe that the stock’s 2020 rebound has run its course. AMZN is still the second worst-performing among FAAMG stocks over the past six months, having outperformed only Facebook (FB) by a little. Trading at a long-term PEG of 2.3x, AMZN may not necessarily qualify as a value stock. But in my view, the multiple seems reasonable enough to justify owning shares at current levels.
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Source: Seeking Alpha