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Amazon Looks Expensive. Is It a Buy?

By Chris Neiger - Jan 21, 2021 at 8:40AM

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Here are two reasons why the stock for this e-commerce giant still is.

Amazon's (AMZN 0.25%) stock price rallied 76% in 2020, as the company grew in the wake of a worldwide pandemic. E-commerce demand surged as social distancing and lockdowns became routine and, as a result, Amazon's share price skyrocketed.

The company's shares are currently priced at 58 times Amazon's forward earnings, easily putting them on the more expensive side for many investors. But despite this, Amazon still looks like a great investment for long-term investors. Here are a couple reasons why. 

Reason 1: E-commerce is alive and well 

Amazon's e-commerce platform experienced tremendous growth last year, with North American sales increasing 37% year over year and diluted earnings per share climbing 68% in the first nine months of 2020. 

Multiple packages sitting on a doorstep.

Image source: Getty Images.

The company has long been in a dominant position in the U.S. e-commerce market, and when the pandemic hit, the company's vast logistics network and massive e-commerce platform kicked into high gear. As consumers purchased more goods online, Amazon even ramped up hiring, adding 400,000 new positions just to keep up with demand.  

But last year's e-commerce growth obviously won't keep Amazon's share price climbing in the future, so what about e-commerce demand now? The good news for Amazon, and its investors, is that it's likely much of that 2020 e-commerce demand will continue to stick around. 

Recent research from McKinsey shows that 70% of consumers plan to continue, and even increase, e-commerce shopping even after social distancing is long gone. Additionally, in the first nine months of 2020, only 14.5% of all U.S. retail sales were online, which leaves plenty of room for the e-commerce market to expand -- and Amazon's sales along with it -- in the coming years. 

Reason 2: There's no end in sight for cloud computing growth

Aside from Amazon's on-going e-commerce opportunity, the company continues to benefit from cloud computing as well. Amazon Web Services (AWS) holds about 33% of the public cloud computing market and is leaps and bounds ahead of the next competitor, Microsoft, which holds 18%. 

Spending in the public cloud computing market will grow to an estimated $362 billion in 2022, up from $258 billion in 2020. With Amazon's huge lead in this space, it's likely that the company will continue to experience significant AWS growth as the public cloud spending expands. 

The cloud is an important part of Amazon's future growth because the company earns a significant portion of its operating profit from the segment. In the first nine months of 2020, AWS had $32.6 billion in sales and $9.9 billion in operating profit. Compare that with the company's North American e-commerce sales of $161 billion and just $5.7 billion of operating profit, and you'll understand why AWS is so important to Amazon. 

Keep this in mind for 2021

Amazon, like many other companies in 2020, saw its share price jump as investors poured into tech stocks. The stock market is still running hot right now, but investors should understand that just because Amazon's stock surged last year, it doesn't mean that it will put up similar gains in 2021. Investors should instead focus their attention on the fact that Amazon is in a fantastic position in the e-commerce and cloud computing markets, and that the growth from those two should drive the company's share price high enough to outpace the market in the coming years. 

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