Amazon's Holiday Preview
At the current rate, we may as well re-name Christmas into Amazon day, because no other entity profits from the fruits of Saint Nick quite like the world's largest online retailer. Indeed, Amazon all but invented "Cyber Monday", a spending holiday that's overtaking Black Friday as the shopping event of the year. When it comes to holiday shopping, it's hard to beat Amazon: not only does the company sell almost everything under the sun, but they deliver it to your home instead of forcing you to fight holiday traffic at the mall. With the spending spree only weeks away from officially kicking off, what should investors know about Amazon's forecasts for 2015?
Nearly everyone agrees that 2015 will prove better for Amazon than 2014, but that's setting the bar dubiously low. When the company released their sales projections for the holiday quarter last year, the numbers came in below expectations, causing their stock (AMZN on the NASDAQ, trading for $673 per share) to drop by ten percent in the month of October. While the same stock enjoyed a resurgence during Cyber Monday, the company could not hold on to the momentum and saw their asking price drop by $30 per share by New Years Day. Amazon didn't disappoint in 2014 for lack of trying: the company made inroads into new sales fronts, including grocery delivery and creating television shows for their Amazon Prime TV service. Slow and steady wins the retail race, however, and the depth of Amazon's inventory through 2015 has made up for their lack of success breaking new ground. In fact, 2015 has been a banner year for the company: their stock price has doubled in the past 52 weeks thanks to a series of surges as well as the consistent decay of brick-and-mortar retail. Does that make them cocky about the upcoming holiday spending spree? In a word, yes.
From The Horses' Mouth
Amazon released their Q3 earnings report to a major degree of fanfare. The company announced that they had beaten expected revenue for the third consecutive quarter and that their holiday sales projected to be "higher than ever." The company expects a revenue stream of about $38 billion this holiday season, compared with "only" $30 billion in the 2014 holiday season (for the sake of comparison, only 200 corporations in the entire world have a market cap above $30 billion, while just under half the nations of the globe have a smaller GDP). Why will this season hit lofty higher-than-ever status? Surprisingly, not much of it actually has to do with retail itself. Amazon Web Services, or AWS, has become the company's biggest cash cow. AWS offers web hosting, cloud services, and IT solutions, allowing Amazon to charge whatever number they deem practical for use of their supercomputer library. While AWS brings in only about five billion in revenue, that accounts for half of the company's total profits. Indeed, it begs the question whether Amazon will begin to switch their business model away from retail and towards information technology -- though likely not any time soon, given that there's still another 25 or 30 billion bucks on the books. While AWS doesn't seem to be quite holiday-oriented, there's reason to connect Yuletide spending with their online services: users can purchase a Prime membership for a family in order to store photos, for instance, at the bargain-barrel price of just six dollars a month. As such, Amazon expects ample growth from many of the plum puddings into which they have stuck their lucrative thumbs.
With what appears to be a success story in place, does Amazon stock represent clear pathways to a strong dividend? It's more complicated than a yes or a no, even if the answer leans much more strongly towards yes. The holiday spending market has changed in ways Amazon hasn't anticipated. Christmas spending starts earlier each year: one in four shoppers purchase Christmas gifts prior to Halloween, despite the fact that most retailers don't track such purchases in the "holiday" column. What's more, nearly half of all shoppers claim to have done the "majority" of their shopping prior to Cyber Monday, the day when Amazon rakes in the chips. What's more, Amazon appears to lag behind many of their competitors (including but not limited to Wal-Mart and Target) who now offer free shipping on holiday purchases; only the aforementioned Amazon Prime members enjoy the perks of free delivery. The news, however, is not all bad: Amazon is scoring the lowest price threshold on consumer electronics, a huge mover and shaker of Christmas buying, according to a Fierce Retailer report. With projections of both high prices and low growth, Wal-Mart's stock has gone down by ten percent through the month of October at the same time that Amazon has surged by over $100 per share. The earnings differential has officially pushed Amazon past Wal-Mart for the title of the largest retailer on planet Earth -- and pushes Amazon CEO Jeff Bezos into the slot as the fifth-richest person alive. Investors won't make the millions he did, but can certainly share in the growth.
- The Takeaway: Amazon has been arguably the hottest stock in all of 2015. There's no shortage of things to like: they control the largest segment of the fastest-growing industry on the market, they have an army of loyal customers, and they have expanded their business strategy to new and lucrative areas. Amazon's projections for a strong holiday just put the cherry on top of the decision to invest in their company. Given the rise in asking price, investors won't find a value buy here and shouldn't buy for the purpose of selling off soon. Amazon should be a staple of a portfolio, similar to Apple or GE or Proctor & Gamble, a backbone to provide steady growth for the duration of a lifetime.
- Do Amazon's competitors look as shiny? eBay had a downright dreadful year after a messy divorce with PayPal, losing half their value in a single day. Chinese retailer Alibaba hasn't done any better, with three consecutive quarters of losses. It's good to be king, especially when so many other imitators look like jokers.