To put it plainly, the coronavirus pandemic boosted most of Amazon's (AMZN 0.25%) operations. Social distancing orders placed added value on the services it provided and to the company's credit it capitalized on the situation quite effectively.
The pandemic will not be permanent, and life will at some point slowly return to a more normal reality. Where will Amazon's business be when this happens? Here we will explore Amazon's prospects one year from today.
Amazon fully took advantage of the environment we found ourselves in last year -- and it shows in the company's financial success. In its most recent quarter (ended Dec. 31, 2020) the company eclipsed $100 billion in sales for the first time, with revenue coming in at $125.6 billion -- up 44% year over year on a truly massive base.
Its trailing-12-month operating cash flow soared 72% year over year to $66.1 billion with free cash flow over the same period rising 20.1% despite heavy investments in logistics and a historic hiring spree.
The outperformance does make some sense considering the year our world has just endured. Government mandates forced many brick-and-mortar retail rivals to temporarily close or restrict capacity, which boosted Amazon's gigantic e-commerce presence by limiting consumer selection.
Furthermore, the pandemic accelerated society's digital transformation. Considering this, one could have expected its Amazon Web Services (AWS) segment to enjoy strong demand just like its commerce business did. After all, Microsoft's Azure -- its closest competitor -- realized a slight ramping in growth quarter over quarter during the same period. It posted 48% growth for Azure versus the prior-year's period.
However, AWS did not realize a demand boost. Its year-over-year growth of 29% was the same as the previous quarter despite favorable macro tailwinds; this potentially points to the segment continuing to mature and reach its potential. With AWS boasting far better profit margins than its e-commerce business, this is concerning and there is little guarantee it will be able to turn around.
The ebbing of COVID-19
While we don't know exactly when the pandemic will finally come to end, help is certainly arriving. Over the last several weeks, millions of Americans have received their COVID-19 vaccines, and cases continue to precipitously drop in correlation with this trend. To help supply chains even more, Johnson & Johnson just submitted an Emergency Use Authorization application for its COVID-19 inoculation.
What would this all mean for Amazon?
The return of brick-and-mortar competition should allow stores to more effectively compete with Amazon. This is not to say Amazon's growth will halt here -- far from it. The company has been delivering expansion and shareholder returns for decades and that will not likely change as e-commerce as a whole continues to quickly grow. Still, it does likely mean growth will revert to pre-pandemic levels.
From an AWS perspective, fading social distancing orders could theoretically lead to the return of in-person meeting and collaboration which could be a small headwind there. With AWS' growth already slowing during the heat of the pandemic, a return to normalcy would be great for the world as a whole but perhaps not as great for Amazon. The company's somewhat lofty price to earnings (P/E) ratio of 80.2 makes slowing growth in its two primary areas of business troubling.
Proceed with caution
For years (decades really) Amazon has reliably delivered for investors. While its 2020 was undeniably admirable, a return to normalcy would remove some of the need for Amazon's products. Investors certainly will not be burned by owning this iconic behemoth, but I do think there are better places to invest your funds.
This article represents the opinion of the writer(s), who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.