Stocks to buy

The novel coronavirus pandemic accelerated certain technological trends, resulting in a decade’s worth of growth for the ecommerce sector. Tech and ecommerce giant Amazon (NASDAQ:AMZN) saw its profits increase by a whopping 200% during the pandemic. In addition, Jeff Bezos, Amazon’s eccentric founder, saw his wealth increase by a staggering $90.1 billion. With such a meteoric rise in the past year, you would wonder whether there’s any upside left to AMZN stock.

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Amazon’s share price has stagnated in the past few months. However, with its recent blowout first quarter results and second quarter guidance, it’s clear that its bull case is intact. Its retail, advertising, and Amazon Web Services (AWS) segments are killing it and are three main pillars for its future growth.

Though we might be at the tail-end of the pandemic, it appears that shopping habits have changed for good. As physical stores open up, it’s tough to envision a scenario where shoppers abandon Amazon. Instead, the pandemic has changed customer perceptions and exposed new buyers to the online retail world.

Additionally, the stock is also trading cheaply in comparison to its peer group and earnings profile. With its forward revenue and earnings growth of 27% and 29%, respectively, it trades at a price to sales multiple of just 3.94 times. Hence, AMZN stock is undervalued with a ton of upside potential at this point.

Incredible First Quarter Showing

Amazon’s spectacular first-quarter results show that it isn’t ready to rest on its laurels. First-party revenues shot up 44% from $36.7 billion to $52.9 billion. Moreover, its third-party results were even more impressive, with a 64% year-over-year growth in revenues from $14.48 billion to $23.71 billion. Perhaps the most impressive element was the 77% increase in its “others segment” revenues from $3.9 billion to $6.9 billion in the first quarter.

Profits headed upward mainly due to its high-margin businesses such as AWS, advertising, and third-party services. Moreover, it generated a healthy $1.3 billion in operating profits from the international markets. As a result, it finished with earnings per share of $15.79, more than triple the number from a year ago.

Furthermore, its second-quarter guidance looks solid, with 24% to 30% growth in net sales. It shows that shoppers are sticking with Amazon even as the brick-and-mortar stores open up.

Core Growth Drivers

Amazon’s bull case is based around some of its key growth drivers, which will continue to create new opportunities for the business. The first driver is its hugely popular and profitable AWS. Its value proposition is straightforward. Larger companies find it more cost-effective to outsource their IT infrastructure. However, the major growth opportunity in the segment is driven by the smaller and medium-sized businesses. These businesses cannot upgrade their infrastructure without factoring in prohibitive costs, which is an area where AWS offers an innovative solution.

Moreover, another key driver for the company is its international presence. Amazon’s North American business contributes roughly 70% of retail revenues. Hence, this outlines how massive the international opportunity is for the company. Moreover, it has proven to be highly profitable in the past few quarters. For example, it generated a remarkable $1.3 billion in operating income from international markets in its most recent quarter. Therefore, if Amazon can focus on its international business, it could pay a lot of dividends for it down the road.

Many consider Advertising to be Amazon’s crown jewel. It’s part of its “other services”’ segment, which the company seems to have been mum about. Regardless, the segment generated close to $7 billion in the first quarter, an unbelievable number.  It’s not far off from the $8 billion the company generated from its total subscription services. Ads are an integral part of the stickiness of Amazon’s feeding process. Third-party merchants, in particular, are highly incentivized to use the advertising ecosystem.

Bottom Line on AMZN Stock

Amazon’s stock has slowed down in the past few months, but it’s still firing on all cylinders as far as its performance is concerned. The step-change in consumer attitudes during the pandemic appears to be permanent and will continue to drive growth for the company. Its second-quarter guidance is indicative that customers are sticking with Amazon even in the post-pandemic world. Moreover, with a robust earnings profile and multiple growth catalysts, Amazon is clearly undervalued across major metrics. Hence, don’t put undue considerations on its prospects and go long with AMZN stock.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.

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