The COVID-19 pandemic is causing significant disruption to businesses around the globe. For most companies, these changes are mostly hurtful. Stay-at-home mandates and the closures of non-essential businesses slashed sales at companies that rely on a physical location.
But some companies have seen a boost. The digital nature of the services Facebook (META 1.21%) and Amazon (AMZN 4.50%) provide has helped them grow revenue during the pandemic, for instance. As people try to avoid leaving their homes, they are turning to Amazon to deliver the products they need. And staying home more often means seeing friends and family less often, so people are turning to Facebook and its family of apps for social interaction. Let's take a closer look at why these two companies are likely to continue growing both during and after the pandemic.
Amazon is growing
Amazon started the year with more than 150 million Prime members worldwide, and with the surge of people relying on the company to deliver everything they need, it likely has added millions more since then. Importantly, Prime members spend more on Amazon.com than non-Prime members do. These millions of shoppers then attract more sellers to the site, which creates a larger marketplace of items available to buy. This virtuous cycle is one reason why Amazon is likely to thrive both during and after the pandemic.
Furthermore, Amazon's Web Services segment is fueling profits and generating cash flow that it can use to invest in growth. Even though the segment made up only 12% of sales in the most recent quarter, it made up 58% of operating profits. As an investor, you want to see growth in segments with high margins and AWS checks that box -- increasing revenue by 30% in the second quarter compared to the year-ago quarter.
Also in the second quarter, AWS secured long-term contracts with companies including HSBC, one of the world's largest financial organizations, and Slack, which is experiencing rapid growth. These should help keep the segment growing for years to come.
Amazon appears to be firing on all cylinders as overall revenue increased by 40% in the most recent quarter. What's more, the elevated level of growth is expected to continue into the third quarter, when the company expects to bring $90 billion of revenue at the midpoint of its estimate. That increase in revenue will be partly the result of both new customers and returning shoppers spending more. After the pandemic has run its course, it's likely that some portion of new customers will continue shopping with Amazon.
And while its other segments have surpassed AWS in terms of revenue growth so far during the pandemic, that is likely to reverse in the aftermath. Admittedly, the growth rate at AWS is decelerating as competitors have ramped up. Still, its leadership position in an industry that's growing rapidly should allow it robust revenue growth over at least the next few years.
Since Amazon trades for about $3,300 per share as of this writing, you wouldn't be able to buy a share with $2,000. But that is no need to worry because many brokerage accounts will allow you to buy a fraction of a share.
Facebook gives investors reason to hit the "like" button
People are spending a lot more time at home and Facebook allows communication between friends, family, and colleagues in a safe manner. The company is experiencing surging usage of its family of apps. In its previous two quarters combined, Facebook added 210 million daily active users to its family of apps, which was a 9% increase from the 2.26 billion it had at the end of Q4.
The company generates the bulk of its revenue from advertising. Given that many businesses cut back on marketing budgets at the onset of the pandemic, it's impressive the company still grew revenue by 10% in its second quarter, but for advertisers, there is no alternative platform where they can gain access to over 2 billion consumers. Moreover, they can connect to a precisely targeted group of people, or a more broad group, depending on their needs.
Facebook is achieving double-digit revenue growth at healthy profit margins. In 2017, 2018, and 2019, Facebook's net profit margin was 39%, 40%, and 26%, respectively. The decrease in 2019 was mostly due to a legal settlement the company entered with the Federal Trade Commission to pay a fine of $5 billion. Excluding that expense, the net profit margin would have been 33% in 2019.
Meanwhile, revenue growth for the same periods was 47%, 37%, and 27%. However, investors can take heart that the company still has levers it can pull to increase revenue growth, including monetizing WhatsApp, when it feels the time is optimal. So I'm not alarmed by the deceleration in revenue growth.
While it may be true that when the coronavirus pandemic is behind us, people will reduce their usage of Facebook and its apps, that time may be months, or even years, away. Moreover, when the pandemic has run its course, it's likely that businesses will boost their marketing budgets -- from which Facebook is likely to get a large percentage. This social media stock is poised for growth.