As part of a broader-market sell-off of growth stocks in recent weeks, shares of Amazon (AMZN 0.25%) have slid quite a bit. The stock is down more than 8% since mid-February and is 14% below an all-time high of $3,552.
Is this a good time for investors to consider buying a stake in the world's leading e-commerce and cloud computing company?
Even before COVID-19 hit and sparked a surge in e-commerce transaction volume, Amazon was doing very well. The company's 2019 revenue increased 20% year over year. But its 2020 performance was on a whole different level.
Total revenue surged 38% year over year to $386 billion. Even more impressive, growth picked up speed in the second half of the year compared to the first half -- and Amazon wrapped up the year with a blockbuster ending. Fourth-quarter revenue skyrocketed 44% year over year to $125.6 billion.
Making the company's financial progress even more impressive, Amazon's strong sales combined with its scalable business model is translating to significant operating leverage. As its operating profit margins expand, net income is growing much faster than revenue. Full-year net income was $21.3 billion, up from $11.6 billion in 2019. This came despite many new operating costs directly related to COVID-19, such as COVID testing and sanitation programs.
Going forward, Amazon expects more strong growth. The company guided for first-quarter revenue to rise between 33% to 40% year over year.
Two reasons these are still early days for Amazon
Of course, investors shouldn't expect Amazon's growth rates to remain at 2020's elevated levels. On the other hand, Amazon does look well-positioned for its revenue to grow at strong double-digit rates for years to come -- just not at the levels seen in 2020.
Two major secular trends should propel Amazon's business in the coming years: continued e-commerce growth and the fast-growing cloud computing industry.
Even though e-commerce sales saw a lift from COVID-19 recently, they were still a small percentage of total U.S. commerce. In Q4, for instance, Digital Commerce 360's analysis of the U.S. Department of Commerce's data concludes that only about $245 billion of the $1.2 trillion in fourth-quarter commerce spend was transacted online. Further, Amazon is gaining market share of e-commerce sales, demonstrating its ability to capitalize on this trend. Its e-commerce sales accounted for 41.1% of total U.S. e-commerce sales during Q4, up from a 36.8% share in the year-ago quarter.
But Amazon isn't just an e-commerce business. Its cloud computing business accounted for more than half of Amazon's operating income in 2020. Fortunately, there's good reason to be optimistic about this business, as well.
Grand View Research estimates that between 2020 and 2027, the global cloud computing market will grow at a compound average growth rate of about 15%. Historically, Amazon's cloud business has grown even faster than the market -- and there's no reason to expect this to change in the near future.
Amazon stock: Buy, sell, or hold?
Though the stock's price-to-earnings ratio of 73 may seem expensive, investors should keep in mind that its earnings per share (EPS) is growing much faster than revenue, thanks to Amazon's operating leverage. And analysts seem quite optimistic on continued strong EPS growth. On average, analysts expect Amazon's earnings per share to grow 38% annually over the next five years.
Amazon's business is doing well and its prospects for further growth in the years to come looks promising, so the stock's sell-off presents a good opportunity for investors to start a small position in this stock at an attractive valuation.