Without question, COVID-19 has made an impact across the economy, particularly with retailing. The contagion appeared to benefit companies like Amazon (NASDAQ:AMZN), simply because it allows for shopping while greatly reducing the risks associated with going to crowded stores.
Conversely, this might also create investor fears that a coronavirus vaccine could hurt the consumer discretionary stock as it could result in pre-pandemic buying patterns returning.
Such an occurrence may create questions about Amazon sales (and the potential effect it might have on the company's stock price) in the near term, but prospective buyers have three good reasons to ignore those worries and buy Amazon stock despite the concerns.
1. Amazon's sales history
Indeed, consumer reaction to COVID-19 gave Amazon's retail sales a significant bump. In the second quarter of 2020, sales increased by almost 42% from the same quarter last year. This compares to the second quarter of 2019 when sales rose by around 18% from year-ago levels.
Investors should notice though that sales likely still increased without the help of a pandemic. The one benefit to these pandemic sales is that they have given Amazon a reprieve from potential sales growth slowdowns that could have occurred had the pandemic not happened. In 2019, the sales growth of its retail operations rose by 18.5% from year-ago levels. That was actually a slowdown from the yearly increases of approximately 29% in 2018 and 30% in 2017.
Hence, COVID-19 looks to have given Amazon's retail sales a temporary bump. And although sales growth rates may again fall below 20%, investors need to remember that double-digit sales increases will probably continue for a long time to come.
2. The power of Amazon Web Services
The retail sales figures referenced above are not directly related to activity from Amazon Web Services (AWS), its cloud computing unit. AWS is still a relatively small portion of the company's overall revenue, but AWS accounts for most of Amazon's profits.
At just over $10.8 billion in sales in the most recent quarter, AWS made up only about 12% of overall sales. However, thanks to high gross margins, its almost $3.4 billion in operating income accounted for more than 57% of the company's operating income.
Despite all of the talk about remote work moving tasks to the cloud, earnings growth dropped slightly. In the most recent quarter, revenue increased by about 29% over year-ago levels, a decline from the 37% year-over-year increase reported for AWS in the second quarter of 2019.
Nonetheless, investors should probably take the slightly slower growth in stride. According to the hosting platform Kinsta, AWS leads the infrastructure segment of the cloud computing industry. Also, Grand View Research forecasts that the cloud industry will grow at a compound annual growth rate of about 15% through 2027. AWS's growth far exceeds that rate, strongly positioning the company both now and after the pandemic ends.
3. Amazon is reasonably valued
Admittedly, calling Amazon "inexpensive" may seem outrageous, given its forward P/E ratio of around 64. However, net income increased by 97% in the most recent quarter. Also, analysts project 38% profit growth for this year. In 2021, when most analysts expect the pandemic to have receded, they are forecasting a profit increase of 40%.
At $1.7 trillion, Amazon's market cap only lags behind that of Apple as of the time of this writing. Normally, companies that size would struggle to produce high-percentage earnings increases.
However, as mentioned before, the relatively small percentage of revenue earned by AWS generates the majority of the company's profits. As long as this part of the company can maintain its high growth rate, Amazon stock should continue to benefit. Knowing this, it is little wonder why some analysts see a "massive upside" in Amazon.
Amazon has shown it can generate significant growth regardless of how coronavirus affects the company. Hence, those wanting to buy Amazon stock before a vaccine comes out have no reason to wait.