The pandemic has proven the mettle of many businesses this year, including online retail giant Amazon (AMZN -0.48%). When brick-and-mortar stores were forced to close, the company excelled at providing people the products they needed. It was years ahead of its peers from the very beginning, and now, as a coronavirus vaccine gets closer to being available, Amazon's plans demonstrate it has what it takes to succeed far into the future. But Amazon stock is expensive, trading at a price-to-earnings ratio over 90. Is it worth buying?
Business is thriving
Amazon sales grew 58% from 2017 to 2019, and the pandemic has given a further boost to business as people turned even more to online shopping. In the third quarter of 2020, sales increased 37% year over year, leading the company toward $377 billion in sales for the whole year using the midpoint of the company's estimate for fourth-quarter sales. That would be a 34% jump from the year-ago period, which would be a bigger jump than the company saw in 2018 and 2019.
Even more impressive is the company's increase in operating income and free cash flow, which highlights the strength of its core businesses. Operating income for the third quarter nearly doubled year over year, while free cash flow increased by $6 billion over the trailing 12 months. With so much extra cash in hand, Amazon is well positioned to fuel growth in its different business units while also continuing to give back to the community through its philanthropic outreach programs.
Indeed, Amazon's ability to grow and invest in communities creates a win-win situation that can have far-lasting effects. Community outreach efforts improve brand image and customer trust, which translates to better consumer attitude and loyalty over the long term. Behavioral scientists have found that community outreach or community support programs have a stronger positive effect on customer loyalty than even good service, often increasing willingness to pay premium prices and lowering the risk of a reputation nosedive if a company crisis strikes.
The company is still growing
Amazon's business is boosted by more than online shopping, which means that even post-pandemic, Amazon sales should continue to grow. Even now, despite the boom in e-commerce, online sales account for a mere 13.5% of all sales in the U.S.
Additionally, Amazon Web Services (AWS) is growing at a solid pace as cloud services explode in popularity. The company recently signed new contracts with several large-name companies, where AWS will provide digital management of payment processing, back-end support for coordinating medical developments, and moving legacy contact centers to the cloud. And while cloud service users have many providers from which to choose, Amazon continues to invest resources in AWS as part of its future growth strategy, consistently ranking above many of its major competitors on Gartner's cloud infrastructure and platform service evaluation for both adaptability and overall usefulness.
Although AWS currently makes up a small 12% of company sales, its high profit margin means that 57% of Amazon's third-quarter operating income came from this business unit, and it seems there is plenty of room for further expansion.
Amazon has also been releasing more products on its platform under its white-label program, where it sells products manufactured by a third party under Amazon branding. The company has paid particular attention to e-commerce categories with increasing consumer interest, such as food, auto, and home goods. Through careful market research based on the buckets of shopping data from its millions of customers, Amazon is able to adjust its selling strategy to cater to its customers' future needs, almost before they know they'll need it. So as more and more online shoppers move to buy these types of products, Amazon will have already set a solid foundation ahead of potential competitors. It will also have tested and proven a strategic pattern that it can follow as online retail interest cycles through different categories.
Overall, Amazon is a thriving tech company that has taken advantage of the current economic environment to position itself for strong growth in the near term. While its stock price is admittedly high, the company's price-to-earnings ratio has dropped despite its stellar earnings reports, indicating that the stock is comparatively less expensive than it was a short time ago. Not many large-cap companies are able to consistently grow during economic times both good and bad, but Amazon has proven that it has the resources and ability to flex according to its customers needs. With a solid foundation, little reputational risk, and plenty of new business to continue its growth trend, if I could buy only one stock, it would be Amazon.