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Is Amazon Stock a Buy?

By Anders Bylund – Sep 24, 2020 at 9:27AM

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With a trillion-dollar market cap and market-crushing stock returns, is the e-commerce veteran still a buy?

E-commerce giant Amazon.com (AMZN 1.20%) is having a fantastic year. The COVID-19 health crisis resulted in more online shopping, which is great news for the undisputed leader in that sector. Work-from-home policies also drove a greater need for solid cloud computing services, another area where Amazon holds a market-leading position. The stock has gained 62% year to date, even after a 16% retreat from early September's all-time highs.

Has Amazon burned all of its rocket fuel by now, or is the stock still a buy? Let's have a look.

A yellow charting arrow smashes upward through a blue brick wall.

Image source: Getty Images.

Didn't we miss the boat on Amazon already?

The story so far has been downright fantastic. Amazon's stock price has grown more than fivefold over the last five years and nearly 20-fold in a decade. Trading at roughly $3,000 per share, Amazon seems likely to split its shares again someday soon. The market cap is a gargantuan $1.5 trillion, with a T.

If you backed away from buying Amazon stock every time the shares looked expensive, you missed all of those stellar gains. The company was unprofitable for nearly a full decade, and management has never focused on maximizing the bottom-line earnings. Cash flows are more important, and low earnings are actually an effective way to lower the company's tax bills.

So Amazon skyrocketed for years and years, drowning out the cries of "Overvalued!" and "Expensive!" with the roar of rapidly rising sales. That's growth-stock investing in a nutshell -- funnel every spare dime into growth-boosting activities until it's time to flip the switch and optimize the bottom-line profits instead. Amazon wrote the book on this strategy and is adding new chapters every year.

A large fleet of Amazon Prime delivery trucks.

Image source: Amazon.

What's next?

Amazon is not resting on its impressive laurels. Founder and CEO Jeff Bezos famously runs the company as if every day is the first day of operations at a hungry start-up company. The Amazon Web Services cloud computing service now generates the lion's share of Amazon's operating income. The company reinvented the e-commerce industry again when the Prime shipping service committed itself to two-day deliveries -- and again with next-day shipments, which now sometimes arrive on the same day orders are placed.

The network of shipping centers is exploding right now as Amazon is adding hundreds of fully staffed new hubs. The Federal Aviation Administration recently approved Amazon's drone-based delivery process. If Amazon's naked sales-growth ambition doesn't excite you, I think you should stick to ultrasafe value stocks instead. This is the stuff that dreams and wealth are made of. Amazon still has a lot of growing to do given that e-commerce still accounts for a small minority of all retail activity in the United States. The international opportunity is even larger.

Yes, Amazon is a buy today. The road ahead may be bumpy, but we'll look back at that $1.5 trillion market cap in a few years just to marvel at how small Amazon was in 2020.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Amazon. 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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