Amazon (NASDAQ:AMZN) stock soared back to near all-time highs after the e-commerce and cloud giant reported second-quarter numbers which breezed past expectations on the back of strong shopping-from-home trends.
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In the big picture, these shopping-from-home trends are secular in nature. As are the growth trends underlying Amazon’s various other businesses, including Amazon Web Services, Amazon Advertising and Twitch.
Plus, Amazon has huge untapped potential in self-driving and next-generation physical retail, either of which could turn into huge businesses over the next several years.
Amazon’s strong earnings report confirmed that this is a powerful, multi-faceted growth story to which every growth investor should have exposure.
So buy AMZN stock, and stick with AMZN stock.
This is a long-term investment. Not a near-term trade.
Here’s a deeper look.
Strong AMZN Stock Earnings
Amazon’s earnings report was strong, and confirmed that this company is tracking in the right direction against its enormous opportunities in e-commerce, cloud computing and digital advertising.
Online retail sales rose 49% year-over-year, a strong acceleration from the trailing four-quarter average growth rate of 20%.
More importantly, North America retail operating margins were flat year-over-year, and stabilized quarter-over-quarter on a trailing 12 month basis, after declining for several consecutive quarters. At the same time, international retail operating margins rose 520 basis points year-over-year to 1.5%. Trailing 12 month margins rose to a multi-quarter high of -1.3%.
Broadly, then, the e-commerce business is simultaneously growing rapidly and benefiting dramatically from economies of scale.
Amazon Web Services growth did come in light. Revenues rose just 29% year-over-year, continuing what has been a multi-quarter slowdown in AWS growth. That’s not a great sign in this environment, because other cloud businesses — like Microsoft’s (NASDAQ:MSFT) Azure — are accelerating growth at this time.
But, 29% growth is still an impressive mark for a market leader, and the slowdown is mostly just a function of big hospitality and travel customers scaling back spending. That spending will come back once those industries rebound. So this is just a near-term headwind. Plus, AWS operating margins meaningfully improved in the quarter (up 580 basis points year-over-year).
The ad business was impressively strong in a down digital ad spending environment. “Other” revenues — which are mostly ad revenues — rose 41% year-over-year, largely consistent with the trailing four-quarter average growth rate of 42%.
Overall, then, Amazon had a solid quarter, and the pop in AMZN stock makes sense.
Multiple Long-Term Growth Drivers
In the big picture, Amazon’s strong quarter doesn’t really matter too much.
You’re not buying AMZN stock for the quarter. You’re buying AMZN stock for the next 10 years, a stretch in which Amazon has an opportunity to create multiple huge technology businesses.
Of course, there’s Amazon.com, the online retail arm. This is already the largest e-retail platform in the world. But the novel coronavirus has permanently accelerated e-commerce adoption, to a point where we could see global e-retail sales growth meaningfully accelerate over the next several years. Amazon is doing everything right to defend its leadership position in this market with things like free next-day shipping, so accelerated market growth should spill into accelerated Amazon.com retail sales growth.
There’s also AWS, the cloud computing business. Again, this is already the largest cloud infrastructure business in the world. But, again, Covid-19 has permanently accelerated the shift toward digital workflows, and ushered in a new era of the hybrid office, where remote work will become quasi-normal. In that world, cloud infrastructure demand roars higher, and AWS becomes a much bigger business.
Amazon Advertising is young. But growing quickly. And it has a lot of room to expand. Thanks to accelerated digital ad spending trends. And thanks to Amazon’s robust repository of consumer purchase data.
The physical retail business has a ton of long-term potential, as Amazon scales its cashier-less Amazon Go store concept.
Today’s nascent self-driving pursuits — highlighted by the recent acquisition of Zoox — lay the foundation for Amazon to potentially create a self-driving logistics service, which the company offers to other retailers.
All in all, Amazon offers investors multi-faceted, high-quality exposure to all of tomorrow’s most important growth industries.
Amazon Stock Is Reasonably Valued
The only reason not to buy AMZN stock here is if the valuation were overextended.
By my numbers, AMZN stock is only slightly overvalued, and certainly not by enough to throw in the towel.
My modeling suggests that there is a visible pathway for Amazon to hit $1 trillion in sales within the next decade. Assuming margins continue to scale, I see earnings per share winding up around $250 by 2030.
Based on a 25 times forward earnings multiple, that implies a 2029 price target for Amazon stock of $6,250.
Using an 8.5% discount rate, that implies a 2020 price target for AMZN stock of $3,000.
Until AMZN stock shoots significantly above $3,000 — closer to the $3,500 range — I say stick with the rally, given the strength of the company’s core growth narrative and the high degree of visibility to big growth for the next several years.
Bottom Line on AMZN Stock
Amazon’s second-quarter earnings confirm that management continues to execute strongly against the company’s enormous long-term growth opportunities.
So long as that remains true, Amazon will be supported by one of the most robust and promising growth narratives in the whole market.
And because of today’s low rates, this is a “story market.” Stocks with great stories tend to go higher. Amazon will be no exception to this trend.
So stick with AMZN stock. A little valuation friction here and there won’t derail the rally.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long AMZN and MSFT.
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