Sales and profits have been surging for Amazon (AMZN -2.56%) since the onset of the pandemic. As consumers of both essential and discretionary products relied increasingly on online retail and web services, the e-commerce retailer and tech giant made sure its services were available, and superior, no matter what hurdles lay in front. The reliability Amazon demonstrated over the past few quarters to its customers, arguably at the time of their greatest need, will surely go a long way in securing customer loyalty.
Investors got a glimpse of Amazon's earnings power with scale in 2020 as operating profits soared. Let's dive into the details and see why Amazon stock is still a buy.
Image source: Getty Images.
1. Resilience during challenging times
Even as sales surged at the onset and during the pandemic, Amazon delivered products and services nearly uninterrupted. Moreover, it did so without raising prices to consumers at the time of their greatest need, and arguably at a time where they would be willing to pay more.
Amazon was able to meet greater online shopping demand partly by rapidly increasing capacity. It hired 500,000 people globally in 2020 and paid them well. In all, Amazon paid out $91 billion, or nearly 24% of its total revenue, as compensation to its employees last year.
Additionally, Amazon spent heavily to maintain the safety of employees during the pandemic. The company is spending an estimated $2 billion per quarter on COVID-related costs. That money goes toward testing, personal protective gear, and paid time off for employees exposed to the coronavirus. Without these efforts, customers could have faced delays in receiving packages, and worse, Amazon could have contributed to the spread of the virus.
On the other hand, the goodwill gained with customers through efficient services, could keep them with Amazon for a long time to come.
2. 200 million Prime members
Amazon started 2020 with 150 million Prime members. Then followed the extraordinary circumstance of the global coronavirus pandemic. People were afraid to go to stores. Millions turned to Amazon to deliver the things they needed and wanted. Moving rapidly to add capacity, Amazon was able to meet the surging demand with fewer hiccups.
The result of Amazon's extraordinary performance is an additional 50 million customers signing up for its Prime services over the next 12 months. The subscription provides members with free and fast shipping on millions of items with no minimum spending required, and at a subscription price less than that of a Netflix subscription. Without doubt, Prime subscription is of huge value to folks who find themselves ordering items online more often while a deadly global pandemic is going on.
Finally, fears of Amazon's sales declining in the aftermath of the pandemic could be overblown. The 50 million who signed up for Amazon Prime is evidence of a pandemic-induced uncertainty in the days to come. Moreover, Amazon invested heavily throughout the year, increasing capacity at warehouses, buying planes to speed up delivery, and adding hundreds of thousands of employees. That's going to result in more selection for consumers and even speedier shipping times.
Besides, its COVID-related costs, which are hitting operating income at roughly $2 billion per quarter, will drop significantly in the aftermath of the pandemic as well.
3. Amazon Web Services is thriving
In a letter to shareholders, Jeff Bezos revealed that the Amazon Web Services segment that earned $45 billion in revenue in 2020 could easily generate $50 billion or more soon at the current growth rate. Furthermore, AWS is a profit powerhouse. In 2020, even though the segment made up just 12% of sales, it commanded a whopping 59% of all operating profits.
If you apply the operating profit margin of AWS over the last 12 months (29.8%) to the $50 billion annualized sales, AWS's operating earnings should easily top $15 billion over the next year. For perspective, that's more than the operating profit Amazon generated as a whole in 2019 at $14.5 billion.
Still, as with every investment, there are risks involved. For one, the stock is not cheap, selling at a forward price-to-earnings ratio of 70. But that's below the peak of over 90 it was trading for around September of 2020. Nevertheless, it's a hefty price to pay. One way to alleviate the risk of paying too much for a stock is to dollar-cost average your desired purchase amount. And even though signs point to consumers sticking with Amazon post-pandemic, there is no telling how they will actually adjust to life on the other side of the crisis.
Long-term investors who are looking for a growth stock that can do well both during and after the pandemic can feel good about starting a position in Amazon.
