U.S. Markets closed

Why Amazon Is a Buy After Its Stock Price Slump

Having fallen 10% in the last year, Amazon.com Inc. (NASDAQ:AMZN) could still have investment appeal.

The company's valuation may still be relatively high, but its growth prospects in areas such as the smart home segment and cloud computing could stimulate its profitability and stock price over the long run.

2042087580.png


Smart home market

Amazon's continued investment in its Alexa virtual assistant could increase its share of the fast-growing smart home device market. Global sales of smart speakers are forecasted to grow at a compound annual rate of 39% between 2019 and 2025. They form part of a wider smart home market that is expected to be worth $53 billion by 2022, which is 51% higher than its current $35 billion value.

The company added a variety of innovative features to its Alexa virtual assistant in the second quarter that could increase its differentiation versus sector peers. One of these features, Alexa Announcements, allows users to broadcast a one-way message to their Alexa devices.

It also released the Alexa Privacy Hub that provides its users with greater control over their Alexa experience. In addition, Alexa Guard was released in the U.S. This provides its users with greater safety protection through detecting the sounds of smoke alarms and glass breaking.

The company's innovative features are contributing to a rise in the number of smart home devices that are compatible with Alexa. This should strengthen Amazon's market position and widen its economic moat.

Retail growth potential

The company's ongoing investment in its retail operations could strengthen its competitive position. For example, in the second quarter it expanded its Whole Foods Market grocery delivery service. The service is now available in around 90 cities across the U.S., with its free one-hour delivery likely to induce higher rates of customer loyalty.

Amazon introduced innovative experiences in its Fashion segment in the second quarter. For example, The Drop gives its customers exclusive access to limited-edition collections, while the company's StyleSnap artificial intelligence-powered feature allows its customers to shop by taking a screenshot of a specific item. This could increase Amazon Fashion's appeal to younger customers, and boost the size of its total addressable market.

The company's expansion of its Amazon Go physical stores to 13 locations in the second quarter may help it to compete with retail rivals. Its brick-and-mortar stores provide additional flexibility and convenience for its customers that may broaden its appeal to a wider range of consumers.

Potential threats

Amazon had a 41% share of the total U.S. e-commerce market in 2018. This is expected to rise to around 50% by 2021. The company's financial prospects could, therefore, be negatively impacted by an uncertain outlook for retail sales. For example, The Conference Board's measure of consumer sentiment declined by the most in nine months in September, with consumer views on the state of the economy and its outlook deteriorating sharply versus the prior month. This could lead to reduced spending levels across a variety of retail segments, which may hurt Amazon's sales growth over the near term.

The growth potential of the company's cloud computing segment could counter the uncertain prospects for its retail operations. Amazon Web Services has a 48% market share of the infrastructure as a service = market, which is forecasted to grow at an annualized rate of 26% over the next three years.

Amazon Web Services could increase its share of the overall cloud segment through its continued innovation. For instance, in the second quarter, it announced the release of Amazon Personalize. It provides Amazon Web Services customers with the ability to develop applications that provide customized marketing in order to boost their consumer engagement rates. This may enhance Amazon Web Services' appeal to a wider customer base.

Outlook

Analysts forecast that the company will post an increase in its earnings per share of 41% in fiscal 2020. Even though it has a forward price-earnings ratio of 73, Amazon's long-term growth prospects suggest it offers investment appeal.

Disclosure: The author has no positions in any stocks mentioned.

Read more here:



Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

This article first appeared on GuruFocus.