Following second-quarter results from Amazon (AMZN 0.38%) late last month that were far better than analysts were expecting, is now a good time to buy the growth stock? With shares up an incredible 73% over the past 12 months, this is likely a question on many investors' minds, as some people may feel like they missed their chance to buy into this exciting growth story.
A close look at Amazon's booming business, however, shows that shares are still attractive today.
Image source: Amazon.com.
A huge second quarter
Investors had high expectations for Amazon going into its second quarter. After all, e-commerce was a clear beneficiary of consumers' sheltering at home due to COVID-19. Yet Amazon still managed to blow away elevated expectations.
In Q2, Amazon's revenue rose 40% year over year to $88.9 billion. Net income doubled, hitting $5.2 billion and translating to earnings per share of $10.30. Analysts, on average, were expecting revenue of $81.5 billion and earnings per share of $1.46.
This strong bottom-line performance was particularly impressive considering that the company spent $4 billion on incremental costs related to COVID-19 during the quarter, including $500 million worth of "special thank you" bonuses to its front-line employees and delivery partners. In addition, management said it has created more than 175,000 jobs since March and is currently bringing 125,000 of these new employees into full-time positions.
This momentum highlights how critical Amazon has become to the way people shop today. Even more, COVID-19 likely accelerated the adoption of e-commerce by both third-party merchants and consumers, laying a foundation for continued strong growth in e-commerce for years to come.
Valuing Amazon stock
Despite the outstanding performance Amazon demonstrated during a pandemic, some investors may still question the growth stock's valuation. After all, the company currently trades at 120 times earnings.
But investors should note the impressive operating leverage in Amazon's business model. The company was able to double its net income year over year in Q2 even as it spent $4 billion on COVID-19-related items. While Amazon's revenue is unlikely to increase this rapidly after consumers return to their normal lives, this quarter's strong showing previewed the operating leverage Amazon can demonstrate in the years to come.
There's still plenty of room for Amazon's sales to continue growing. After all, going into 2020, e-commerce penetration in the U.S. was just 15%. Of course, e-commerce adoption around the world accelerated during Q2 -- a trend that will undoubtedly have some permanent ramifications and will ultimately force many retailers to transform digitally much faster than originally anticipated. As Amazon's sales grow in the coming years and operating leverage leads to outsize profit growth, quarterly earnings will likely not only rival Q2 2020 but will even be significantly higher
In short, though on the surface Amazon's price may seem high relative to earnings, the company's strong operating leverage, promising prospects for e-commerce, and recent sales growth momentum make the stock's current valuation a premium worth paying up for.
Of course, investors should expect significant volatility in Amazon's stock price in the weeks and quarters ahead. Given the stock's huge move higher in 2020, it's highly unlikely that shares can avoid occasional sharp declines. But for investors willing to hold for five years or more, today's price will likely prove to be a solid entry point in hindsight.
