Why am I not buying Amazon shares?

Amazon dominates the e-commerce market and has seen tremendous growth over the past few years. In fact, in 2018, the company recorded net sales of $233bn, and these increased to $386bn in 2020. In 2021, net sales should easily exceed $400bn. Profits have also increased in line with sales, with the company seeing year-on-year profit growth of 84% in 2020.

But despite such excellent growth, there are signs that the pandemic boom is easing, and growth is starting to slow. Indeed, for Q4 2021, Amazon expects sales between $130bn and $140bn, which is ‘only’ year-on-year growth of between 4% and 12%. Further, the company is experiencing several headwinds due to labour shortages, wage inflation and global supply chain constraints. This is likely to lead to around $4bn in costs and will see fourth quarter operating profits drop significantly from the $6.9bn it recorded last year. Such slowing growth makes the company’s price-to-earnings ratio of around 60 hard to justify. It remains a hugely successful company, of course. But all this is why I’m avoiding Amazon shares, in favour of other e-commerce stocks.

The e-commerce stock I’d buy instead

Sea Limited (NYSE: SE) did extremely well during the pandemic. At its IPO it was $15 a share (in 2017), yet it reached more than $350 a share in 2021. But things have been worse recently, and the shares are currently priced at around $170. This is partly due to rising inflation, which is a major negative for growth stocks, and will likely make it more expensive to borrow money. Further, this month, the company’s largest shareholder, Tencent, also reduced its stake in the company. This saw the shares dropping around 10% on the back of this news. So, why would I still buy?

Firstly, the company offers far more than just an e-commerce stock. Indeed, it also provides mobile gaming and digital payment services. This includes the mobile app Free Fire, which was the most-downloaded mobile game globally in 2019 and 2020. Free Fire brings in a significant amount of profits and cash flow to the company.

These profits have been reinvested in the e-commerce business, Shopee, and the payments, subsidiary, Sea Money. I’m particularly impressed by Shopee, considering its recent expansion. In fact, it now operates all around the world, including in Asia, Latin America, and some parts of Europe. Many of these countries, especially in Asia and Latin America, are expected to see very large growth in the e-commerce sector.

Such diversification has also meant that revenues for 2021 are likely to reach around $9bn, over a 100% increase year-on-year. As such, it’s clear that Sea Ltd is growing at a far quicker pace than Amazon, even though it remains unprofitable. After its recent dip, Sea Ltd also trades at a price-to-sales ratio of just over 10, which seems reasonable for such a fast-growing company. Therefore, I’m extremely tempted to buy some shares.

The post Here’s an e-commerce stock I prefer to Amazon shares appeared first on The Twelfth Magpie.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon and Sea Limited. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I’m not surprised by this purchase (despite the fact Smith has been critical of Amazon’s business model in the past). In my view, Amazon is a ‘must-own’ stock and I’ve been buying the stock too in recent months. As a result, it’s now one of my largest holdings.

Here’s a look at three reasons I’m buying Amazon shares.

Why I’m buying Amazon shares

The first reason I’m bullish on the stock is that I believe the group’s e-commerce division has a huge growth runway ahead of it. While the online shopping industry has experienced strong growth in recent years, I think there’s plenty of growth to come. According to Vision Research, the global e-commerce market is expected to grow from $3.7trn in 2020 to $8.7trn by 2030. Amazon should benefit from this growth.

What strikes me about Amazon is that its market share in the UK and Europe is still quite low (well below what it is in the US). Given Amazon’s dominance and economies of scale, I think it will be able to capture significant market share in these regions in the years ahead.

High growth potential

The second reason I’m excited about Amazon is the potential growth in the company’s cloud computing division, AWS. The cloud computing market looks set to experience strong growth in the years ahead as businesses go digital.

Between now and 2030, the market’s expected to grow by nearly 20% per year. Currently, Amazon has a 40%+ market share of the cloud industry, so I expect its related revenues to rise significantly going forward. Recent Q2 results showed 37% growth in this division.

Attractive share price set-up

Finally, I think the share price set up and the valuation are attractive. After a big run last year, Amazon shares have been consolidating this year. I see this as very healthy as the shares have now built a solid base around the $3,000-$3,500 level from which they can move higher in the long run.

As for Amazon’s valuation, it’s high (forward-looking P/E of 65). However, I don’t think it’s outrageous given the company’s dominance in two high-growth industries.

Risks

Of course, there are risks to the investment case. One thing to consider with Amazon is that it can be a very volatile stock at times. In the past, it’s regularly had pullbacks of 20%+. It could easily fall 20-30% again if we see a high level of stock market volatility.

Another issue is regulatory uncertainty. Given Amazon’s dominance, regulators are keeping a close eye on the company. Recently, the company has been investigated by the UK’s Competition and Markets Authority.

I’m bullish on Amazon shares

Overall however, I see the long-term risk/reward proposition here as attractive at the current share price. I’m bullish on the shares and I think it’s very encouraging that Fundsmith has been buying recently.

The post Fundsmith has been buying Amazon shares… and so have I appeared first on The Twelfth Magpie.

More reading

• SpaceX vs Amazon stock: here’s where I’ve got my money
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• If this Dow Jones stock were valued like SpaceX, here’s how much it would be worth…
• 3 exciting space stocks to consider buying that aren’t SpaceX
• Amazon stock falls while SpaceX soars – is this a buying opportunity?

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns shares of Amazon and has a position in Fundsmith Equity. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Good results

Amazon released its Q2 results on 29 July. As expected, these results contained some encouraging numbers. Operating income, net sales, and operating cash flow saw increases of 24%, 27%, and 16% respectively. So why did the Amazon shares tumble over 8% the same day? The reason for this, as my fellow Fool Charlie Keough pointed out, was the somewhat disappointing Q3 projections. Projected growth for Q3 was estimated to reach the $106bn-$112bn range, falling short of the original $119bn projections. This fall is likely due to the reopening of economies leading to less online shopping.

Although the share price dipped, it is important to note that these results still show growth. If Amazon continues this impressive growth moving forward, I expect the share price to rise accordingly.

Diversified business

Amazon boasts a heavily diversified portfolio of services and subsidiaries besides its traditional e-commerce business. Two notable mentions include Amazon Web Services (AWS) and Amazon Entertainment.

For example, Amazon Prime Video turned over a $108.5bn revenue in Q1 of 2021, reporting streaming hours had increased by 70% comparative 2020 Q1. This is a great example of how the firm benefited from the pandemic and why Amazon shares skyrocketed as a consequence. With the pandemic threat still lurking, it is businesses such as Prime Video that will continue to drive revenue higher for Amazon.

In addition to this, AWS has been gaining significant customer momentum and is currently the fastest-growing part of Amazon’s business. AWS has been selected as exclusive cloud software by a number of industry giants across multiple markets. These include Ferrari, BMO Financial Group, Swisscom, and the National Hockey League. This cross-industry presence is reflective of Amazon’s dominance in its field, and I don’t expect this to be challenged anytime soon.

Risks to Amazon shares

The one issue that Amazon could face moving forward is slowing growth. The rapid growth experienced in 2020 isn’t likely to be experienced again, and as increased competition arises, Amazon’s market share could dwindle. That being said, this is a longer-term factor but is still worth keeping in mind.

In addition to this, Amazon currently has a beta of 1.32. This means Amazon shares tend to move at a higher magnitude than the wider equity market. This exposes investors to much larger market risk.

I think that moving forward we will see equity markets push higher, and Amazon shares will directly benefit from this. Its broad business portfolio is great for increasing revenues but may face competition in the long term. Anyhow, I would add Amazon shares to my portfolio today.

The post Is now the right time to buy Amazon shares? appeared first on The Twelfth Magpie.

More reading

• SpaceX vs Amazon stock: here’s where I’ve got my money
• 3 reasons I’m still bullish on out-of-favour Amazon stock
• If this Dow Jones stock were valued like SpaceX, here’s how much it would be worth…
• 3 exciting space stocks to consider buying that aren’t SpaceX
• Amazon stock falls while SpaceX soars – is this a buying opportunity?

Dylan Hood has no position in any shares mentioned above. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended the following options: long December 2021 $130 calls on Ferrari, long January 2022 $1,920 calls on Amazon, and short January 2022 $1,940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.