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Robinhood Traders Are Stocking Up on Amazon Today. Should You?

By Lawrence Rothman, CFA – Jul 20, 2020 at 7:49AM

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Amazon is a favorite stock among the brokerage house's customers.

Robinhood is an online brokerage company founded just a few years ago. During that time, it has helped popularize the commission-free model that has attracted individual investors to its platform.

The brokerage puts out a list of its most popular stocks that its customers are buying, and Amazon (AMZN 1.26%) is on it. Of course, this can turn into a self-fulfilling prophecy, with investors piling on and pushing the share price to even greater heights.

It's important to look at the company's fundamentals to see if you should join the party.

Several shipped boxes sitting in front of a door.

Image source: Getty Images.

A peek at Amazon

Amazon has become so prevalent in our everyday lives that it's hard to believe it started in 1994 as an online bookseller. It quickly expanded to offer many different products. This boosted its revenue, but it was unprofitable for many years.

Fast forward to today, and Amazon sells just about everything on its website and generates huge profits. Its popular Amazon Prime subscription program combines unlimited free shipping on many items and a streaming service for an annual membership fee. The company also makes devices like the Kindle e-reader.

Sales have grown from $107 billion in 2015 to $280.5 billion last year. Better still, the company's earnings under U.S. generally accepted accounting principles (GAAP) went from $596 million to $11.6 billion over the same period.

COVID-19 has helped boost sales as more people turned to online shopping, but shipping costs and safety precautions have temporarily raised expenses. While revenue rose more than 26% to $75.5 billion in the first quarter, net income dropped by 29% to $2.5 billion. With Amazon's dominance in the online market and leading cloud platform, this period of rising costs isn't a long-term concern.

Strong balance sheet

Sometimes, a company will take on debt to support fast growth. However, Amazon has a healthy balance sheet, which is always nice to see. At the end of the first quarter, it had $27.2 billion in cash, along with $22.1 billion in short-term marketable securities. There was $23.4 billion in debt (26% debt/total capital).

In short, the company checks this box.

The valuation

With the stock's remarkable run -- including a 60% rise this year -- giving the company an eye-popping $1.5 trillion market cap, it is fair to ask if the shares are overvalued. Based on traditional measures like the price-to-earnings ratio, Amazon stock is incredibly expensive.

This is really the only downside I see. But the company still has huge growth potential. According to an estimate by eMarketer, Amazon had a strong 37% share of U.S. e-commerce sales in 2019, which is markedly higher than its competitors. This estimate might even be conservative, since other sources claim the company accounts for a larger slice of the online retail pie. The good news is that it has a large share of this fast-growing marketplace.

If you are an investor with a long-term horizon, Amazon's dominance and growth potential make it a worthwhile investment, even though the stock is pricey right now.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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