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Despite Being Overvalued, Amazon Is a Great Long-Term Pick

- By Naman Shukla

E-commerce giant Amazon.com (AMZN) had a great run in 2016 as the stock was up nearly 11%. Moreover, the stock has also displayed strong signs of positive momentum this year, escalating 13% year to date.

Consumers' affinity for online shopping continues to grow at a rapid pace. More than half of its U.S. online customers began their product searches on Amazon at the start of the holiday season, which clearly suggests most retailers are losing ground to it.


According to the latest report from eMarketer, worldwide retail e-commerce sales are projected to reach $4.058 trillion in 2020, accounting for almost 15% of overall retail spending that year. Consequently, Amazon appears to be in a great position to benefit from this growing trend in the future.

Amazon announced fourth-quarter results last month. For the quarter, the company recorded earnings per share of $1.54, easily surpassing the analysts' estimate by 19 cents. On the revenue front, the company reported strong growth of 22.2% on a year-over-year basis, with sales coming in at $43.70 billion. Amazon, however, failed to beat revenue estimates by $980 million.

Over the past few years, artificial intelligence (AI) has turned into one of the hottest growth areas. In 2015, Amazon introduced its first home smart speaker, Echo, which was powered by its cloud-based digital assistant AIexa. While Echo did not gain traction among consumers in 2015, 2016 reveals a completely different story.

Amazon detailed the unit sales of Echo surged nine times on a year-over-year basis and was one of the company's top-selling products during the holiday season. Recently, the company added 4,000 skills to AIexa, bringing its capabilities to over 10,000 skills currently. The company is planning to add more skills to AIexa in the near future.

Although several other major tech companies are also entering this market with similar products, it will be difficult to disrupt Amazon's early lead in this market.

Apart from this, Amazon's AWS business continues to perform well. In 2016, the revenue generated from the AWS business surged 55%, making up approximately 10% of its overall revenue. What's more interesting is the operating income from this segment more than doubled, accounting for 74% of the e-commerce giant's operating profits for the year.

Conclusion

Amazon rewarded investors with strong returns over the past two years. Moreover, the e-commerce giant looks well poised to benefit in the year ahead based on the optimistic outlook for online sales. Although several other major retailers are also aggressively focusing on this market, it does not look like they will be able to usurp Amazon anytime soon.

Apart from this, the company's strong Echo sales suggest the home smart speaker era is just getting started. Currently, the stock trades at a price-earnings (P/E) ratio of 172.67, significantly greater than the industry's average.

Although the stock looks overvalued, it will continue growing at a healthy rate. Accordingly, investors should hold the stock to gain massive benefits in the future.

Disclosure: I don't hold a position in the stock mentioned in this article.

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This article first appeared on GuruFocus.