Shares of Amazon (AMZN -1.64%) are up more than 70% this year, and it seems like the stock market is setting all-time highs almost every day. So why, given such a big run-up, why would I be adding to my Amazon stock right now? I'm glad you asked.
It has nothing to do with Amazon being one of the so-called "stay-at-home" stocks growing during the pandemic. This investment is about years, not quarters. It's about building a bigger stake in a company with brilliant leadership that has positioned itself perfectly in markets that were growing fast before we'd ever heard of social distancing. Here are the main reasons I just bought more Amazon stock.
An Amazon employee works in one of the company's distribution centers. Amazon has spent tens of billions of dollars this year on its distribution network. Image source: Amazon.
1. Room to grow in e-commerce
It may feel like e-commerce is taking over the retail world, but that's only partially true. In the third quarter, U.S. online retail sales surged nearly 37% year over year. The COVID-19 pandemic has dramatically accelerated online sales as people stay home instead of shopping in person. But even with that increase, e-commerce still accounted for only 14.3% of U.S. retail sales. That leaves a lot of room for growth.
According to eMarketer, online retail sales will increase by more than $400 billion between 2020 and 2024. Amazon could take a big chunk of those sales. While it will surprise almost no one that the company is e-commerce's biggest player, what may be surprising is the size of that advantage. eMarketer estimates that Amazon will account for 39% of all U.S. online retail sales this year. No. 2 Walmart, which is growing fast online, is forecast to have just a 5.8% market share, excluding groceries.
Amazon is also coming after the enormous grocery market, which Walmart dominates. Amazon Fresh stores have begun opening as the company targets a bigger share of the massive U.S. grocery market that's on track to produce $750 billion in sales this year.
2. Investing in future growth
Sure, Amazon has that market share, but there are big-time players like Walmart, Target, Best Buy, and others trying to take it. If Amazon was standing still, I'd think those companies had a better chance of putting a big dent in Amazon's lead. The company isn't standing still, though.
Management says Amazon's fulfillment and logistics network square footage will grow by more than 50% this year. Through three quarters, there's been a $30 billion investment in capital expenditures and leases. Additionally, in just four months -- the third quarter and the first month of the fourth quarter -- Amazon hired 350,000 full- and part-time employees as it works to build out its delivery network.
I like these moves for two reasons. First, despite its massive size, this company remains nimble (it was able to make 350,000 hires in four months). Second, in preparing for huge holiday demand, Amazon is spending big to please customers. That could pinch short-term profits, but it reflects thinking I like. It's a long-term approach to keeping 150 million Prime subscribers happy and adding new ones.
3. Great leadership keeps this company evolving
In my opinion, the most compelling part of investing in Amazon is having co-founder and CEO Jeff Bezos and his leadership team working for me. (I'm a silent partner.) The company's evolution from bookseller to everything-seller is remarkable, and so is its ability to diversify revenue streams.
Its most profitable division isn't even e-commerce. It's Amazon Web Services (AWS), the market-share leader in the growing cloud computing space. AWS accounted for 62% of the company's total operating profit through the first nine months of 2020. Its operating margin was 31%, compared to the remainder of the company's operating margins -- largely driven by e-commerce -- of less than 3%.
Now, the company's advertising business is growing fast and also has higher margins than e-commerce. Advertising is the primary source of its "other" category revenue, which grew 45% year over year to $13.5 billion in the first nine months of 2020. While it's only about 5% of total revenue, the company noted in its quarterly report that advertising contributed to gains in operating profit.
4. The decision to buy (again)
Every time I've bought Amazon stock, I've worried about the valuation. That goes back to my first purchase in January 2016, at about $604 per share. On Dec. 4, I paid $3,167 share, and it was trading at roughly 60 times forward earnings. That's a high earnings multiple, but I'm willing to take the risk.
The company has almost always been richly valued and has crushed the S&P 500 for years, as the chart above reflects. With a market capitalization of nearly $1.6 trillion, Amazon's greatest growth days are behind it. But even at these levels, I think it's a strong growth stock that will beat the market for years.
