Amazon's (AMZN 3.43%) stock performance has made shareholders very happy in 2020 with a 73.5% return year to date. This was nearly five times the S&P 500's appreciation over the same timeframe.
While that's great for existing shareholders, have the shares run out of steam? To find the answer, we will need to delve deeper into the e-commerce giant's metrics to figure out if it can maintain the strong revenue and profitability growth trajectories that have fueled this year's sharp share price increase.
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What's behind Amazon's 2020 stock price jump?
With physical stores closed for part of the year and the coronavirus pandemic forcing people to stay at home more, many consumers were forced to turn increasingly to online shopping. This has obviously helped Amazon. In just the third quarter, Amazon's sales (after excluding foreign exchange translations) grew by 37% compared to last year. And, despite taking on higher costs for shipping and fulfillment due to COVID-19, Amazon's operating income nearly doubled to $6.2 billion.
No doubt, this has been a good year for Amazon, and it had nice momentum heading into the holiday season, with early reports noting it got off to a good start for the company. But can the company maintain this strong growth going forward, particularly with the U.K., U.S., and Canadian governments approving COVID-19 vaccines that will eventually allow shoppers to return to traditional brick-and-mortar retailers safely?
Is there more upside for Amazon?
There are good reasons for optimism. Fortunately, Amazon was already growing rapidly heading into this year. A return to people shopping in stores doesn't mean the company's revenue and profitability increases will come to a halt. Amazon's focus on the customer has served it well for a long time, and this is showing up in the company's results. Its revenue grew from 2015's $107 billion to $280.5 billion in 2019. Skyrocketing profitability accompanied this top-line increase with operating income growing to $14.5 billion, about seven times higher than 2015's total.
Aside from its e-commerce site, Amazon sells devices like the Kindle and Alexa. There is also its hugely popular Amazon Prime service that offers unlimited shipping on numerous items and a streaming service for a subscription fee.
The company also has a rapidly growing (and high-margin) business, Amazon Web Services (AWS). This is its cloud-computing division, which helps companies use data to lower costs and make better decisions. In the latest period, the unit's adjusted revenue rose by 29% to $11.6 billion and the segment's operating profit increased by 56% to $3.5 billion. Growth for AWS looks set to remain strong, with CFO Brian Olsavsky stating on the third-quarter earnings call that "We continue to see companies meaningfully growing their plans to move to AWS."
Investor takeaway
It is hard to predict what will happen to a company's stock price in the short run. However, with Amazon's dominance in e-commerce (fueled by offering low prices and fast delivery) and AWS providing tangible benefits to its cloud computing clients, betting against Amazon over an extended period seems foolhardy. If you have a long investment horizon, any short-term volatility will get smoothed out as the company continues to execute its plans.
