The pandemic generated tailwinds for many e-commerce companies over the past year as shoppers stayed home and ordered more products online. The ongoing crisis accelerated the shift from physical to digital stores by roughly five years, according to IBM's U.S. Retail Index, and the changes could be permanent.
I recently diversified my e-commerce holdings with new stakes in Sea Limited (SE 3.56%) and MercadoLibre (MELI 2.20%), which dominate the Southeast Asian and Latin American markets, respectively. Both are still great growth stocks -- but their valuations might be a bit high for conservative investors.
Therefore, there's only one e-commerce stock I'd recommend to everyone, regardless of their tolerance for risk, in 2021. That stock is Amazon (AMZN 2.47%), the world's largest e-commerce company by annual revenue. Let's examine the four top reasons to buy Amazon, even after its stock price has rallied more than 450% over the past five years.
Image source: Getty Images.
1. Amazon Web Services
Amazon generates most of its revenue from its online marketplaces, but most of its profits come from Amazon Web Services (AWS), the world's largest cloud infrastructure platform.
AWS accounted for 32% of the cloud infrastructure market in the third quarter of 2020, according to Canalys. Its closest competitor, Microsoft's Azure, held a 19% share.
AWS' revenue rose 30% year over year to $32.6 billion, or 13% of Amazon's top line, in the first nine months of 2020. Demand for its cloud services rose as more people worked remotely and companies relied more heavily on their online services. Its operating profit jumped 51% to nearly $10 billion, or 62% of Amazon's operating income.
Amazon supports the growth of its lower-margin marketplaces with AWS' higher-margin revenue. That core profit engine, which other brick-and-mortar and online retailers lack, enables Amazon to consistently sell its products at low prices, offer loss-leading discounts, and expand its Prime ecosystem.
2. Amazon Prime
About a year ago, Amazon announced it had over 150 million Prime subscribers worldwide. Last October, Consumer Intelligence Research Partners (CIRP) estimated Prime had 126 million subscribers in the U.S., who accounted for 65% of its shoppers in its most recent quarter.
Image source: Getty Images.
Prime accounts for most of Amazon's subscription revenue, which rose 30% year over year to $18.1 billion, or 7% of its top line, in the first nine months of 2020. That growth is impressive, but Prime's true strength is its ability to lock in shoppers and widen the company's moat against Walmart, Target, and other large retailers.
Prime subscribers gain discounts at both Amazon and Whole Foods, free shipping options, and digital perks like streaming media, cloud storage, and free e-books from the lending library. That expanding digital ecosystem allows it to challenge tech giants like Netflix, Spotify, Apple, and Alphabet's (GOOG 0.98%) (GOOGL 1.04%) Google in the streaming market.
As long as Amazon continues to expand Prime with fresh perks and subscriber-inducing gadgets like the Echo, it will retain the upper hand against its rival retailers. Amazon can maintain that balancing act as long as AWS continues growing and remains more profitable than its core marketplace business.
3. Amazon advertising
Amazon quietly became the third-largest digital advertising platform in the U.S. after Google and Facebook (FB 1.12%) over the past several years. It accomplished this by selling ads across its marketplace as well as third-party websites.
Amazon doesn't disclose its exact ad revenue, but eMarketer estimates it generated $14.6 billion in ad revenue in the U.S. in 2020. That's only about 4% of Amazon's projected revenue for the year, but the firm expects that figure to rise 33% to $19.4 billion in 2021 and grow another 29% to $25 billion in 2022.
The firm notes that Amazon's ad growth accelerated throughout the pandemic, even as Facebook and Google's ad growth decelerated. That acceleration likely occurred because merchants realized Amazon's platform would likely gain more traffic from shoppers than Facebook or Google throughout the crisis.
Moreover, recent concerns about Facebook and Google's targeted advertising practices could benefit Amazon, which collects less personal data than either tech giant.
4. Consistent growth at a reasonable price
Analysts expect Amazon's revenue and earnings to rise 35% and 52%, respectively, in fiscal 2020. In 2021, they expect its revenue and earnings to grow another 18% and 30%, respectively, even as it faces tougher post-pandemic comparisons.
Amazon's stock might seem a bit pricey at about 70 times forward earnings, but that premium is arguably justified by its consistent growth, wide moat, and leadership of the e-commerce and cloud markets. In terms of revenue, Amazon trades at less than four times next year's sales, which makes it much cheaper than e-commerce darlings like Sea and MercadoLibre.
I've owned Amazon for years, and I believe the stock still has room to run in 2021 and beyond. It might not be as flashy as other high-growth e-commerce stocks, but the virtuous growth cycle of AWS, Prime, and its ever-expanding ecosystem still makes it a great long-term investment.
