- Amazon.com has been picked as a standout performer on Black Friday by multiple Wall Street firms.
- The retailer is off to a strong start to Holiday season 2016.
- AMZN stock is now down nearly 5% in the last one month. Is it time to buy into this sell-off?
Amazon.com Inc. (NASDAQ:AMZN) had started the 2016 holiday shopping season with the launch of its exclusive TV program The Grand Tour, featuring the popular trio of Top Gear hosts, which was accompanied by a one-day discount on its Prime membership program. The opening episode of the program became the biggest show premiere on Amazon's streaming service, with new Prime memberships during the day setting a non-prime day record. Contrastingly, the AMZN stock has headed south over the last one month, losing nearly 5% in the period. However, there are many positive reasons to be bullish about the biggest e-commerce player in the world.
Amazon Is Set For A Record Holiday season
Amazon is off to a strong start to the holiday shopping season. As reported by Fortune, Amazon could be on course for a record holiday sales season with the 2016 Thanksgiving day sales surpassing Thanksgiving as well as Cyber Monday 2015 sales. Separately, in an emailed statement, Amazon stated that Black Friday sales were on pace to beat the year-ago numbers. Also, with over 75K deals planned for the Cyber Monday week, Amazon should have no problem in maintaining its strong performance through the Cyber Monday week. (See also: Amazon.com Inc Could Gain Big By Acquiring Souq.com)
While the performance of Amazon has certainly been encouraging, investors should also take note of the broader holiday sales trends, which point to a very strong holiday shopping season in 2016. As per Adobe, total online spending on Thanksgiving and Black Friday crossed $5.27B, a 17.7% YoY growth. Quoting from the Adobe report:
More than $5 billion ($5.27 billion) was spent online by the end of Black Friday, a 17.7 percent increase year-over-year (YoY). Black Friday set a new record by surpassing the three-billion-dollar mark for the first time at $3.34 billion (21.6 percent growth YoY) while Thanksgiving accounted for the remaining $1.93 billion. Black Friday became the first day in retail history to drive over one billion dollars in mobile revenue at $1.2 billion, a 33 percent growth YoY.
Adobe also expects the 2016 holiday shopping season to net a record $91B in total online sales, an 11% ($9.1 B) improvement over the 2015 holiday sales season. In a separate report, retail consultant Customer Growth Partners also sees this holiday season headed for a record finish, expecting the fastest growth since 2012. Amazon had accounted for 60% of US online sales growth in 2015 and held 68% market share of US online sales. Assuming the company can maintain its share of total growth this year, the holiday season could net the company an incremental $5.5B in total sales.
Amazon Prime Memberships Are Now Over 50M
Cowen and Company recently estimated Amazon's US prime member base at 49.5M. Given the strong start the in-house produced 'The Grand tour' has enjoyed, the US prime membership base could well have exceeded 50M. As per Amazon, "the day The Grand Tour debuted, total new Prime membership sign-ups exceeded all previous days with the exception of Amazon’s renowned Prime Day." What's even more interesting is that the show premiered in just 4 countries and Amazon CEO Jeff Bezos has stated that the show will be available globally in December. Well, Amazon's global Prime membership base could be in for a 'Swell'. The Amazon CEO tweeted that the show will be globally available by December. Amazon is probably taking a leaf out of Netflix's book.
— Jeff Bezos (@JeffBezos) November 17, 2016
So why is the growing Prime member base important to Amazon? Well, an average Amazon Prime customer spent 2.4X the amount spent by an average non-prime customer in 2015. With the number of Prime customers rising, Amazon's top line growth will be steeper than it would be with a non-prime dominated customer base.
Recent Sell-Off Makes AMZN Stock An Attractive Buy
Amazon stock sold-off following its Q3 2016 earnings, in which the company missed EPS estimates. However, what drove the lower EPS were investments which should help the company to drive long-term earnings growth. The margins should rise as the investment tapers in the coming quarters. Moreover, its Q3 EPS of $0.52 was still good for over 200% YoY growth. Hence, it's fair to conclude that the company continues to move in the right direction and the market is probably taking a very short-term outlook while punishing the stock. (See also: Is Amazon.com, Inc. (AMZN) Stock Headed For A Rally?)
AMZN stock currently trades at a PE ratio of around 180, and while that does not come across as attractive, investors need to understand the bigger picture. Analysts expect this company to grow its annual earnings at a whopping 42% over the next 5 years, meaning that the company could very easily outgrow its current valuations. The key is to sustain the solid earnings growth, which the company has displayed over the last few quarters. It is here that investments like content for Prime, investing in fulfillment centers, etc.... will help the company to drive long-term earnings growth.
AMZN stock has recently bounced off its 200 day moving average on the daily chart. The stock is now approaching its 50 Day moving average. A breakout above the 50 day moving average accompanied by high volume would indicate a clear reversal of the recent downtrend the stock has been caught in.
Amazon is off to a very strong start this holiday season. With the broader industry trends indicating a solid growth in 2016 holiday shopping, Amazon should be able to ride these tailwinds and deliver a strong Q4 performance. Also, with the recent quarter's margin being hit by increased investments, the margin should recover, as the investment activity tapers. Hence, the EPS miss driven sell-off is temporary and should be used as an opportunity to go long AMZN stock. Amazon stock is now over its 200 day moving average and approaching the 50 day moving average. Any break out over the 50 day moving average accompanied by strong volumes would be a clear signal to go long AMZN stock, as the long term growth story remains as strong as ever. Hence, long term investors should make use of the pullback to accumulate AMZN stock.
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