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Is Amazon's growth engine still strong? The key depends on these two indicators

January 11, 2019 15:08
source: English fortune

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Amazon (NASDAQ: AMZN) is one of the only two stocks in FAANG that have risen in 2018. Last year, the world's largest e-commerce retail company had a return rate of 28.4%, second only to Netflix.

  AMZN Weekly2016-2019

Although the stocks of e-commerce and cloud computing giants have fallen sharply since the beginning of October, considering the overall decline in the market last year, Amazon's annual increase is still surprising. In 2018, the S&P 500 and Nasdaq Composite Index fell by 4.4% and 3.9% respectively.

Looking ahead, considering the downturn in high-growth technology stocks in the last quarter of last year, investors have decided to consider whether it is worthwhile to continue betting on the world's highest-value companies, not other technology giants?

Amazon's third quarterPerformanceIt is unexpected for many investors because the growth of its core business (online merchandise sales) has slowed for four consecutive quarters. This has led many to wonder if Amazon's growth has peaked.

We believe that to judge whether Amazon's growth engine is intact and strong enough, you can focus on two major factors.

Even if there is a slight slowdown in online sales, Amazon can't afford the resulting price. Amazon is the largest online retailer in North America. This competitive advantage is crucial if Amazon wants its growth rate to continue to satisfy investors. For the foreseeable future, we believe that Amazon's dominance in the e-commerce sector does not present any threat.

According to eMarketer researchers, Amazon is likely to record $258.22 billion in retail sales in the United States in 2018. This will account for 49.1% of all online retail sales in the country.

Amazon was originally an online bookstore and has now become a leader in e-commerce, thanks to a strong third-party seller market network, a growing range of merchandise from grocery to fashion, and a very popular Prime member. plan.

This continued dominance also enables Amazon to subvert many mature industries and create new opportunities. It acquired Whole Foods, an organic grocery chain, in mid-2017, a move that spurred the entire physical retail industry.

Amazon's tentacles are expanding into more industries, from advertising to voice-activated gadgets to streaming media. In recent quarters, in addition to revenue growth, Amazon has begun to pay more attention to profitability.

Of course, the risk of preventing Amazon from moving forward still exists. If the US economy falls into recession, Amazon will certainly be affected.

If the company continues to expand into other industries, it may also be subject to review by regulatory agencies. US President Trump has repeatedly criticized Amazon in social media and interviews, claiming that the company's monopoly is hurting other US retailers and postal services.

However, despite these risks, Amazon's earnings are still very impressive. In the most recent quarter, its operating profit soared to $3.7 billion from $347 million in the same period last year. For the nine months ended September 30, Amazon's operating profit was $8.6 billion, up from $1.9 billion in the same period last year. According to FactSet, Amazon's sales in the last quarter of 2018 will increase by 20% year-on-year.

Another major engine for Amazon's revenue growth is its cloud computing business AWS. This is one of Amazon's fastest growing business areas, and technology giants including Microsoft (NASDAQ: MSFT), Google (NASDAQ: GOOGL) and IBM (NYSE: IBM) are vying for market share. In this regard, Amazon is another leader with more than 30% market share.

While AWS's contribution to Amazon's overall sales is not particularly large, it is increasingly important to Amazon's profits. In the nine months ended September 30, AWS's operating profit was $5.1 billion, accounting for 73% of Amazon's total operating profit.

However, as part of the digital economy, competition in the cloud computing market is becoming more intense. All major technology giants are keeping an eye on this business.

For example, Microsoft has been working on a plan to transform to a cloud service provider, targeting companies that want to store data in Microsoft's data center and run applications on it. They don't want to spend a lot of money and manpower on it. The company's internal technology and maintenance.

In the most recent quarter, Microsoft's commercial cloud sales increased by 47% to $8.5 billion, and the profit margin of the business expanded by 4 percentage points to 62%.

Amazon is a leader in many of its operations, making it one of the safest bets in the technology industry. Of course, the stock price of $1656.22 is not cheap. But it's worth noting that it's still nearly 20% lower than the high of $2050.50 in early September.

In addition, Amazon will announce its fourth quarter of 2018 after the close of trading on Thursday, January 31. If there are signs that its AWS business is under pressure due to competition, or its core e-commerce business is about to peak, its stock price is expected to be Under pressure. However, if investors are looking for stocks to buy and hold, Amazon, which loses nearly a quarter of its value in a short period of time, is undoubtedly attractive.

(Article source: English for financial reasons)

                (Editor: DF307)

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