Amazon (NASDAQ: AMZN) stocks have performed fantastically over the long term. Over the past decade through May 31, the e-commerce and cloud computing giant’s shares are up 1,030%, about four and a half times as much as S&P500 index return of 230%.
Given Amazon’s enormous size (it’s the fifth-largest company in the S&P 500 index), many investors are probably wondering whether it’s too late to buy its stock. Below are five reasons why Amazon stock is a buy now.
1. Amazon’s e-commerce business still has a lot of growth potential
Consumers continue to increase the amount they spend online relative to their total retail spending. According to the US Census Bureau, e-commerce sales accounted for 15.9% of all US retail sales in the first quarter of 2024. In 2023, e-commerce sales accounted for 19.4% of total retail sales worldwide, according to Statista, which predicts this percentage will rise to 20.1% by 2024.
With e-commerce sales accounting for only 15.9% of U.S. retail spending and about 19% to 20% of global retail spending, there is still a lot of room for these percentages to grow. And Amazon should remain the biggest beneficiary of this secular trend because it is the world’s largest e-commerce company. According to Statista, Amazon had a nearly 38% share of the US retail e-commerce market in 2023.
2. The cloud computing service still has strong growth potential
Amazon Web Services (AWS) is the world’s largest cloud computing service. According to an estimate by Synergy Research Group, it had a 31% share of the cloud infrastructure services market in the first quarter of 2024. This company – which is highly profitable – has benefited significantly from the strong growth of the sector.
AWS still has a lot of growth potential because the industry’s long-term growth forecasts are robust. This is in large part due to the increasing interest among entities of all kinds to gain generative artificial intelligence (AI) capabilities. Synergy Research predicts that the industry, which had annualized sales of about $300 billion in the first quarter of this year, will double in size in four years. That equates to a compound annual growth rate (CAGR) of about 19%.
3. Amazon Prime keeps getting better and adding new members
Amazon continues to add members in the US and internationally to its Prime subscription loyalty program. The company only very rarely shares its Prime membership numbers, but research firm Consumer Intelligence Research Partners (CIRP) regularly tracks U.S. Prime membership.
Prime membership grew to a record high of 180 million U.S. consumers in March, according to a CIRP estimate. This number represents an 8% increase over the company’s estimate for March 2023. (CIPR’s estimates represent the number of individual consumers who are Prime members, not the number of subscriptions, as members of a household often share a subscription .)
Amazon is constantly adding free benefits to Prime to keep current members happy and entice others to subscribe. The most notable enhancement to the Prime program in recent years was that the company moved its standard free delivery benefit on many items from two days to one day. Some items are also available for free same-day delivery.
Last week, Amazon added something else cool to Prime: Members can get a free ongoing Grubhub+ membership (worth $120 per year) and order Grubhub restaurant deliveries directly on Amazon.com and in the Amazon Shopping app.
Amazon is benefiting from the growth in its Prime program in two ways. First, it generates more subscription revenue. A standard membership in the US costs $139 per year or $14.99 per month. Second, it appears that Prime members spend more money than non-members on Amazon’s e-commerce site. A 2021 CIPR study found that members spent just over twice as much as non-members on Amazon’s site.
4. Numerous other opportunities for growth, especially in advertising
Amazon has numerous other businesses with growth potential: digital advertising, healthcare, Prime Video and smart home gadgets, to name a few.
The company’s advertising business is particularly notable because it is growing rapidly and is believed to be quite profitable, as is the industry as a whole. In the first quarter of 2024, Amazon’s advertising revenue rose 24% year over year to $11.8 billion. This activity accounted for 8.2% of the company’s total quarterly revenue of $143.3 billion.
5. Amazon stock is fairly valued
Wall Street analysts expect Amazon’s earnings per share (EPS) to grow at an average annual rate of 28.2% over the next five years. The company’s shares are currently priced at 37.9 times forward earnings estimates. While this isn’t a cheap valuation, it’s reasonable for a stable company like Amazon that generates strong cash flows from operations.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Beth McKenna has no positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
Is Amazon Stock a Buy Now? was originally published by The Motley Fool
