Amazon AMZN has come a long way since its founding back in 1994. The changes over the past few years have been especially impressive, and they have translated to big gains for investors. In fact, over the last five years, the company’s share price has climbed by more than 220%. But with all the share price appreciation experienced over the years, investors can’t help but wonder if AMZN shares still have room to move higher.
Every company has its strengths and weaknesses, and indeed, Amazon is no exception. Below, we will outline some of the company’s greatest strengths and weaknesses. After assessing the facts, we will determine whether Amazon is a buy, hold, or sell.
Strengths
Amazon has a ton of growth potential, and the company doesn’t look like it will be slowing down anytime soon. Sales grew by 20% between 2014 and 2015. The e-retailer looks to carry that momentum through this year, where sales are projected to grow by 21%.
As an online retailer, the company has immense potential. The company can afford to price items lower than traditional brick-and-mortar stores. This is because the costs of employing people, keeping a store running, and so on are reflected in the prices you see at retail stores. Retailers are already feeling the pressure from online sellers such as Amazon. Shopping online is growing in popularity, and Amazon stands to benefit the most from this trend.
Amazon isn’t your average e-retailer either. The company is fully engaged in making innovative products. The company has products like Dash Buttons or Echo, which are impacting the way many people shop and interact with technology in their homes.
These innovative products are also helping Amazon to sell more goods on its site, and pull more investors into its important Prime Service too. Prime members receive many benefits such as free two-day shipping across millions of products, free music, and access to exclusive discounts. Amazon keeps adding features to the lucrative Prime service. The company’s latest addition to this $99 per year membership is PrimeNow, which offers free two-hour shipping to 16 metropolitan areas across over 10,000 products.
Weaknesses
Amazon’s valuation is pretty hefty, and the forward PE of 129.62 illustrates this well. Furthermore, Amazon has a PEG of 3.15, which suggests that Amazon may not be trading at a bargain relative to expected earnings growth. So far in 2016, share price performance has been pretty horrendous, as AMZN shares are down 14% year to date.
A big reason why Amazon’s PE is so inflated is because of the hopes investors have in the company’s ability to become more profitable. As of right now, the company’s expenses consistently eat away at most of the company’s gross profit, helping to push Amazon’s net margin to just 0.56%, a pretty low level for any retailer. And while the corporation made a significant move towards being more profitable over the last quarter, hopefully the online retailer can continue to increase its EPS as it moves forward.
Bottom Line
Amazon’s making the right moves to be a great company in the long run, but many would argue that AMZN shares are simply worth too much based on the e-commerce giant’s ability to bring profits to shareholders. In terms of generating more income, last quarter’s EPS of $1.00 could reassure investors that there are more profitable times ahead for the company.
Amazon has received four negative earnings estimate revisions from analysts over the last 60 days for this quarter. In the same time frame, six analysts revised their estimates upwards. Our EPS Consensus Estimate has trended lower over the last 90 days, going from $0.70 to $0.59. On our VGM Score, which is a weighted average across value, growth, and momentum metrics, Amazon receives a “C”.
With this, it’s hard to be bullish in the near term on AMZN shares. However, the bull argument is still very strong over the long run, especially if Amazon can reduce its costs. Over the near term, Amazon is a Zacks Rank #3 (Hold).
A “Hold” rank may not be the most exciting position to take on Amazon, but it’s appropriate. You don’t want to buy the stock now because the company’s shares could stand to lose some weight over the short term. At the same time, you don’t want to sell shares of AMZN now because the company could beat our earnings expectations like it has in three of the last four quarters. With mixed estimate revision activity, it may be best to wait and see what Amazon’s results will be like when it reports its next quarterly earnings at the end of April.
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