Why I’m Not Selling My Amazon Stock, Even After a 500% Gain

I believe brighter days are still ahead for the e-commerce and cloud giant. Read More...

I believe brighter days are still ahead for the e-commerce and cloud giant.

Back in 2016, I started to accumulate shares of Amazon (AMZN -1.61%). I only trimmed my position once over the following eight years, and I’m currently sitting on a gain of nearly 500% on my remaining shares.

Amazon is now my largest position and accounts for 6.5% of my portfolio. I’ve been tempted to prune that stake again, but I’ve decided to not sell any more shares for four simple reasons.

An Amazon Prime delivery truck.

Image source: Amazon.

1. The flywheel is still spinning

From 2016 to 2023, Amazon’s revenue grew at a compound annual growth rate (CAGR) of 23% as its split-adjusted earnings per share (EPS) rose at a CAGR of 42%. That growth was driven by the expansion of its online marketplaces and Amazon Web Services (AWS), the world’s largest cloud infrastructure platform.

Amazon subsidized the growth of its lower-margin online marketplaces with AWS’ rising operating profits, and that strategy enabled it to expand its Prime ecosystem with loss-leading strategies like discounts, free shipping, and digital streaming services. AWS’ support, along with the gradual expansion of its higher-margin advertising business, gives Amazon a wide moat against its less diversified retail competitors. I believe that flywheel effect will continue to drive Amazon’s expansion.

2. Its growth rates are stabilizing

Amazon experienced a major growth spurt during the pandemic as more people shopped online and more companies signed up for its cloud-based services. But those tailwinds dissipated as the pandemic passed. Inflation and rising interest rates then curbed consumer purchases and drove many companies to rein in their cloud spending.

In 2022, Amazon’s revenue only rose 9% as it incurred a net loss from its withering investment in Rivian Automotive. But in 2023, its revenue grew 12% as it returned to profitability. That acceleration was driven by the stabilization of its North American and International retail segments — which benefited from higher delivery speeds, higher ad sales, and its expansion into higher-growth markets. AWS’ growth also accelerated again as more companies upgraded their cloud infrastructure to support heavier workloads, large language models, and new generative AI services.

For 2024, analysts expect its revenue and earnings to grow 11% and 56%, respectively, as its core businesses stabilize. Simply put, brighter days are ahead as the macro environment improves and its cloud business continues to expand.

3. Its margins are expanding again

Amazon’s operating margin declined from 5.3% in 2021 to 2.4% in 2022 as its e-commerce and cloud businesses struggled with the macroeconomic challenges. However, its operating margin rose to 6.4% in 2023 as it laid off tens of thousands of employees, tightly managed its infrastructure costs, and executed other cost-cutting measures.

At its North American business, Amazon generated more sales from its higher-margin third-party sellers instead of its lower-margin first-party marketplace, consolidated multiple deliveries into single packages, and reduced its logistics costs by regionalizing its networks. Its international operating margins also stabilized it and reduced its expenses, while its advertising business generated higher-margin revenues from its sponsored product and streaming video ads.

Analysts expect Amazon’s operating margin to expand to 9.7% in 2024, and then rise to the double digits in 2025 and 2026 as it continually streamlines its business. That’s a clear sign that economies of scale are kicking in.

4. It has plenty of long-term growth potential

Amazon’s stock might not seem cheap at 40 times forward earnings, but it has plenty of room to grow. The global e-commerce market could still expand at a CAGR of 16% from 2024 to 2029, according to Mordor Intelligence, while Precedence Research expects the global cloud infrastructure market to grow at a CAGR of 12% from 2023 to 2032.

As the leader of both markets, Amazon could continue to generate double-digit revenue and earnings growth for years to come. It should continue to crush smaller e-commerce and cloud companies as it expands into adjacent markets.

Amazon is still a great long-term investment

Amazon isn’t immune to macro headwinds, it could be targeted by regulators, and it faces plenty of competitors. However, I believe it can overcome those challenges — as it repeatedly did in the past — and soar even higher over the next few years.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.

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