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Should I Buy Amazon Stock?

By Daniel B. Kline - May 24, 2020 at 11:30AM

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Does the high-flying retailer have room to go even higher?

Amazon (AMZN 3.15%) was built for shelter-in-place. The company had to shift some of its supply chain to meet changing consumer demands, but it did that relatively quickly -- and the online leader has been thriving.

Stock in the retail giant has traded near its 52-week highs, despite prices taking a bit of a dip after it reported first-quarter earnings. That's not due to the company reporting bad news. Net sales rose by 26% to $75.5 billion, but net income dropped to $2.5 billion from $3.6 billion in the same quarter last year.

That drop happened due to the added expense of adjusting its business to operate during the coronavirus pandemic. Some of those costs are ongoing, while others were one-time adjustments brought on by the current circumstances.

An Amazon tractor trailer in a parking lot

Amazon's business has gotten bigger during the pandemic. Image source: Amazon.

Amazon is getting stronger

The pandemic has been a boom period for Amazon, just not in the way you might think. It's more expensive to operate now -- and that has curtailed profits -- but the current crisis has driven new customers to the company while also increasing engagement of existing customers.

"From online shopping to AWS to Prime Video and Fire TV, the current crisis is demonstrating the adaptability and durability of Amazon's business as never before, but it's also the hardest time we've ever faced," said CEO Jeff Bezos in the Q1 earnings release.

Bezos made it very clear that Amazon's short-term goals are not about driving profitability. He was very straightforward in his remarks:

If you're a shareowner in Amazon, you may want to take a seat, because we're not thinking small. Under normal circumstances, in this coming Q2, we'd expect to make some $4 billion or more in operating profit. But these aren't normal circumstances. Instead, we expect to spend the entirety of that $4 billion, and perhaps a bit more, on COVID-related expenses getting products to customers and keeping employees safe.

Amazon can do that because it has profits -- something that few retailers can say right now. The retailer isn't saying it's never going to make money again. It's just devoting one quarter of profits on business expenses and enhancing the safety of its workers.

"This includes investments in personal protective equipment, enhanced cleaning of our facilities, less efficient process paths that better allow for effective social distancing, higher wages for hourly teams, and hundreds of millions to develop our own COVID-19 testing capabilities," Bezos said. "There is a lot of uncertainty in the world right now, and the best investment we can make is in the safety and well-being of our hundreds of thousands of employees."

Is Amazon stock a buy?

While its share price is high, that should not be a deterrent. Buy a fractional share if you have to (just make sure your trading platform does not tack on fees for doing that), and you will own a small piece of a company that's serving multiple stakeholders well.

Amazon delivers items customers need and it, of course, sells lots of stuff people just want. It also has a strong device business and the ever-growing Amazon Web Services suite of products.

Few businesses are positioned as well as Amazon to perform well no matter what the economic conditions are. The company will emerge from the pandemic with more customers and more people using its devices. That's a recipe for long-term growth and a smart reason to buy in as a shareholder.

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