Why is everyone talking about Amazon (NASDAQ:AMZN) stock?

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Amazon.com, Inc.‘s (NASDAQ: AMZN) stock has rallied over 70% this year, making it the hottest stock in the FAANG cohort, which also includes Facebook, Inc. (NASDAQ: FB), Apple Inc. (NASDAQ: AAPL), Netflix Inc (NASDAQ: NFLX), and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL).

Wall Street also remains overwhelmingly bullish on Amazon, with an average price target of more than $3,700 per share — which is nearly 20% above its current price. Let’s see why analysts still love Amazon, even after its valuation hit $1.6 trillion, and why its stock could still have room to run.

Amazon Web Services

Amazon’s cloud unit AWS (Amazon Web Services) grew its revenue 31% year-over-year to $21 billion, or 13% of Amazon’s top line, in the first half of 2020. That revenue growth was already robust, but AWS’s operating profit surged 48% to $6.4 billion and accounted for 65% of Amazon’s operating income.

That growth is impressive for two reasons. First, AWS is already the world’s top cloud infrastructure platform with a 31% market share in the second quarter of 2020, according to Canalys, and its continued growth keeps it ahead of competitors like Microsoft Corporation‘s (NASDAQ: MSFT) Azure, Alphabet’s Google Cloud, and Alibaba Group Holding Ltd (NYSE: BABA) Cloud.

Second, most of AWS’ competitors aren’t profitable. Alibaba operates its cloud business at a loss, while many analysts believe Microsoft and Google, which don’t disclose their cloud profits, are likely taking losses. AWS can consistently generate profits because it has a first-mover’s advantage and superior scale.

AWS already serves massive customers like Facebook, Netflix, Twitter Inc (NYSE: TWTR), Walt Disney Co (NYSE: DIS), and multiple government agencies. That well-established customer base and its expanding ecosystem should ensure AWS remains Amazon’s core profit engine for the foreseeable future.

Amazon Prime

Amazon subsidizes the growth of its lower-margin North American unit and its unprofitable international unit with AWS’ profits. That’s the opposite of Alibaba’s business model, which subsidizes the growth of its unprofitable cloud business with its higher-margin core commerce revenue.

AWS’ profits enable Amazon to consistently sell its products at low prices while expanding its ecosystem with brick-and-mortar stores (including Whole Foods and Amazon Go), streaming media platforms, and cheap hardware devices. All those efforts strengthen Amazon Prime, which surpassed 150 million paid members globally at the end of 2019.

Amazon Prime’s discounts, free shipping options, digital services, and other perks lock shoppers into its e-commerce ecosystem and prevent them from buying products from rival retailers. Therefore, Prime’s growth buoys the long-term expansion of Amazon’s online marketplaces, which still generate the lion’s share of its revenue.

The pandemic is generating tailwinds instead of headwinds

Amazon’s cloud and e-commerce businesses were already flourishing before the pandemic, but the crisis lit a fire under both businesses.

As more people stayed at home and worked remotely and accessed more online services, demand for AWS’ services climbed across multiple industries. As brick-and-mortar stores shut down, shoppers bought more products from Amazon’s e-commerce marketplaces.

Amazon initially warned that COVID-19 expenses would curb its earnings growth in the second quarter. But its revenue still rose 34% year over year in the first half of 2020, compared to 20% growth in 2019, and that accelerating revenue growth offset its higher expenses. As a result, Amazon’s net income still grew by 26% as its earnings per share (EPS) rose 24%.

Amazon expects its revenue to rise 24%-33% year-over-year in the third quarter. Analysts expect its revenue and earnings to rise 32% and 38%, respectively, for the full year. Those rosy estimates indicate Amazon remains a solid investment for both pandemic-stricken and post-pandemic markets.

It’s still reasonably valued

Amazon trades at 58 times forward earnings. That valuation might seem frothy relative to other retailers, but it’s a bargain compared to other high-growth cloud companies.

Moreover, Amazon’s dominance of the cloud and e-commerce markets, the resilience of those businesses throughout the pandemic, and the ongoing expansion of its ecosystem all justify that slight premium. That’s why Amazon will likely remain a top stock to own for long-term investors.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Leo Sun owns shares of Amazon, Apple, Facebook, and Walt Disney. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Alibaba Group Holding Ltd., Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, Microsoft, Netflix, Twitter, and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney, long January 2022 $1920 calls on Amazon, short January 2021 $115 calls on Microsoft, long January 2021 $85 calls on Microsoft, and short January 2022 $1940 calls on Amazon. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, Netflix, and Walt Disney. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Why is everyone talking about Amazon (NASDAQ:AMZN) stock? appeared first on Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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