Amazon.com, Inc. (NASDAQ:AMZN) is on the path of world domination. AMZN stock is still a good buy.
With the shares of Jeff Bezos led Amazon (NASDAQ:AMZN) at all-time highs, nobody is willing to bet against the online retail behemoth in 2018. Almost everybody on the Wall Street is bullish on Amazon stock with 40 out 46 analysts having a buy or strong buy rating as per Yahoo Finance. Amazon stock has been on fire over the last few years. In our recent coverage, we had highlighted few key factors impacting Amazon shares heading into 2018. Amazon stock presently trades at 311 times its earnings making it a very expensive stock but time and again we have seen, it cannot be analyzed like other stock. Analysts seem to have full faith in Amazon. Let's now take a look at some trends which could again make 2018 the year of Amazon.
Alexa could further boost Amazon's e-commerce revenues.
In the recently concluded holiday season, Amazon's smart speaker echo dot was the top-selling Amazon device, as well as the top-selling product available from any manufacturer across all categories on the e-commerce platform, selling millions of units. And, 2018 could just be another big year for Amazon's Alex powered smart speakers. Research firm Canalys forecasts global smart speaker market to grow to 56.3 million shipments in 2018, with Amazon and Alphabet's (NASDAQ:GOOGL) Google at the forefront.
Canalys Research Analyst Lucio Chen states that "Smart speaker uptake has grown faster than any other consumer technology we’ve recently encountered, such as AR, VR or even wearables." Alexa was the star of CES 2017. Now again in 2018, experts are suggesting that Amazon Alexa vs. Google Assistant could emerge as the key battle of CES 2018. Amazon's success at CES 2018 could further enhance the adoption of Alexa everywhere. The point here is that the widespread adoption of Amazon's smart speakers and its AI assistant Alexa could turn out to be one of the big tailwinds for Amazon's e-commerce business. Ask me why. Take a look at the chart below.
According to a survey conducted by the Consumer Intelligence Research Partners (CIRP), Amazon Echo customers spend 66% more than an average customer on Amazon. With the sale of smart speakers to pick up further in 2018 and the already installed base of millions of Echo devices, the increased spending of Echo device owners could substantially boost Amazon's e-commerce revenues. “We’ve long thought that Amazon is keenly focused on building increasingly loyal and frequent shopping customers, and Echo seems to promote that goal,” said Josh Lowitz, Partner and Co-Founder of CIRP.
Advertising revenues could be another key growth driver.
Though the majority of the internet advertising market is dominated by the duopoly of Google and Facebook (NASDAQ:FB), Amazon can slowly make a mark and become the third big advertising force behind these two tech giants. There have been many reports which suggest Amazon is keen to take its advertising business to next level. Reports suggest that the online retail giant is planning to introduce new advertising products in 2018 as well as planning to sell advertising beyond Amazon sites and products.
The best chance for Amazon in the internet advertising space is the search-based advertising. As per analytics firm, One Click Retail, the e-commerce company has an edge over other competitors in this space. Their study finds that over 50% of product searches on internet begin on Amazon and it has the best expertise to convert click-throughs to sales. Already many brands are slowly putting aside a portion of their ad budgets for Amazon given the solid ROI. Many analysts are also betting on Amazon's advertising business to grow big in the coming years. eMarketer forecasted that Amazon's ad revenue share is expected to rise steadily going ahead. It's US digital ad revenue share is expected to increase from 5.45% in 2017 to 7.3% in 2018.
M&A talk could drive Amazon stock.
After a slow year in terms of acquisitions in 2016, Amazon packed up 2017 strongly with a slew of acquisitions from a wide range of industries. Amazon's Whole Foods Market (NASDAQ:WFM) purchase was the cherry on the cake. The strategic acquisition of Whole Food seems to have given a big boost to the company's Amazon Fresh segment. One Click Retail study finds that Amazon Fresh sales began to see an increased growth right after the takeover announcement, even before any new products were released. It still needs to be seen whether the trend continues in 2018 but till now things are looking up for Amazon.
Now, with 2018 only getting started, already a lot of M&A chatter related to the online retailer has got going. Recently, in a write-up, Gene Munster, former Wall Street analyst and VC, suggested that the Jeff Bezos led company will acquire another brick and mortar retail player Target (NYSE:TGT) in 2018. The M&A talk on many occasions had driven Amazon stock higher in 2017, so, one could expect that 2018 would be no different.
AWS would continue to drive Amazon profits.
Forrester in its recent Cloud predictions for 2018 suggested that the total global public cloud market will be $178B in 2018, up from $146B in 2017, and will continue to grow at a 22% compound annual growth rate (CAGR). The report also stated that public cloud platforms would be the fastest growing segment and will generate $44 billion in 2018. With such optimistic predictions about the Cloud market in 2018, Amazon's AWS is likely to maintain its leadership position even with peers like Microsoft (NASDAQ:MSFT) Azure growing at a much faster rate. AWS was the leader in the IaaS and PaaS cloud segments in 2017.
Gartner’s latest worldwide public cloud services revenue forecast further predicts IaaS, where AWS is the market leader, currently growing at a 23.31% CAGR, will outpace the overall market growth of 13.38% through 2020. This really bodes well for Amazon's AWS which has significantly improved the company's bottom line. The trend is set to continue in 2018 as well.
Analysts and investors seem to have strong faith in the vision of Jeff Bezos who is on the quest of world domination. Despite Amazon stock's strong performance over the last few years, it still makes a good buy given the pace at which it is entering new markets and has the ability to disrupt the industry. It is very difficult to evaluate AMZN stock by conventional methods as it operates in a totally different plane than other tech giants.
Even though AMZN stock trades at 311X earnings, it is quite interesting to note that the stock presently trades well below its 5-year average PE ratio. Wall Street has also started getting more bullish on Amazon, with Citi Research analyst Mark May being the latest to raise his price target to $1400, which is nearly 14% higher from its last close. We could see much more price-target hikes in the coming days. As we had mentioned in our last post on Amazon, it looks better placed when judged on the free cash flow generation metric, as 25-30% growth in cash flow growth in 2018 suggests it is still a good buy with the strong growth opportunities ahead.
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