Amazon.com, Inc. is the largest online retailer in the world, and its stock is a hot topic among Wall Street investors. Starting from humble beginnings, Amazon has grown into a tech giant, surpassed in value by only a few companies. It operates both in the U.S. and internationally, selling various consumer products. What’s interesting about Amazon’s stock is that despite its profits typically being just above break-even, its stock price has consistently risen. Some critics think Amazon might be in an economic bubble that’s bound to burst, but the company keeps thriving and innovating, with investors showing strong confidence in its stock price. So, should you hold on to your Amazon shares?
In the fourth quarter of 2015, Amazon’s earnings report didn’t quite meet Wall Street’s high expectations. They reported earnings of $1.00 per share, which fell short of the projected $1.56. This was mainly due to higher fulfillment and shipping costs. Even though worldwide revenues rose by 22% to $35.7 billion (26% when not considering currency exchange fluctuations), they still missed the consensus estimate of $35.93 billion. Amazon had about 304 million worldwide active customer accounts, which dropped to around 280 million when excluding customers who only made free orders in the last 12 months, showing a 26% increase from the previous year. Meanwhile, paid Prime memberships grew by 51% year-over-year, and active Amazon Web Services (AWS) users exceeded 1 million. AWS sales reached $2.405 billion in Q4 2015, up from $1.42 billion in Q4 2014, and continues to deliver impressive growth margins, making it a crucial part of Amazon’s future.
2015 was a standout year for Amazon, with three consecutive profitable quarters. The stock price more than doubled to almost $700 before settling back below $600, which has made some investors anxious about protecting their gains. A key concern is Amazon’s trailing P/E ratio of 850, indicating that the stock might be significantly overpriced. While the future P/E looks better at 105, it’s still high compared to an estimated annual growth rate of 60% over the next five years. Nevertheless, tech companies often defy traditional accounting and mathematical models, so it’s important to look at the fundamentals of Amazon’s business.
While Amazon’s stock has seen some decline, the company and the retail industry are going strong. More offline businesses are shifting to online sales. Despite a dip in sales from big offline retailers like Wal-Mart and Kmart, Amazon’s sales revenues topped $100 billion in 2015. The National Retail Federation observed that online shoppers outnumbered in-store shoppers during Black Friday in the U.S. If this trend continues or picks up, Amazon stands to gain.
Amazon Prime saw a 51% increase in membership last year, crucial for the company’s future. While exact membership numbers aren’t publicly available, estimates suggest nearly 80 million subscribers worldwide. For an annual fee of $99.99, Prime offers a variety of free services, which could boost customer loyalty since frequent users tend to spend more. A recent survey showed that 49% of new Prime members and 68% of four-year subscribers spend over $800 annually on Amazon. In just the third week of December 2015, Amazon gained 3 million new Prime members globally and shipped over 200 million more items for free compared to the previous year.
AWS continues to show strong profit margins, posting profits of $687 million on sales of $2.4 billion in Q4 2015. AWS, a leader in cloud computing services, rents out computing power, data storage, and networking to clients. It’s expected to be a major revenue driver, with the industry projected to grow from $49 billion in 2015 to $67 billion in 2017.
Even though Q4 earnings were weaker than expected, many analysts remain optimistic about Amazon. Institutions like JPMorgan, S&P Capital IQ, and Bank of America Merrill Lynch have continued their positive outlook.
Considering Amazon’s dominant position in consumer ecommerce and cloud computing, holding onto your Amazon stocks and waiting for the next growth cycle could be a sensible strategy. However, short-term investors might find other opportunities, like binary options trading, which can offer high returns regardless of Amazon’s stock price direction.