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Amazon Is Showing No Signs of Slowing Down

Amazons continues to show very healthy growth, with its retail operations continuing to outdistance the competition.

On Friday, Amazon’s  (AMZN) - Get Free Report shares sold off nearly 8% following its Q1 2020 results in which it profits disappointed. 

But investors are not appreciating that Amazon continues to solidify its competitive advantage. Even though Amazon declared that it will reinvest all its Q2 2020 profits into COVID-related expenses, it is still growing its revenues at 22%-25% year-over-year for the foreseeable future and investors are only being asked to pay approximately 29 times its trailing cash flows from operations. Amazon is a strong investment opportunity. Here's why:

Retail Operations Soar, But Profits Will Be Reinvested

The message from Amazon is clear that even on essential products, where Amazon was close to breakeven on a contribution profit basis, large volumes have a huge benefit to Amazon's business model. Given that Amazon has a very large fixed cost basis, higher volumes are hugely beneficial to its margins.

Hence, the fact that Amazon’s North America unit grew at approximately 29% not only plays a huge role in its bottom-line performance. And looking ahead to Q2 2020, there’s the assumption that Amazon will continue to benefit from a surge in demand, despite the overall uncertainty.

Accordingly, although at the midpoint Q2 2020 is guided for approximately 23% year-over-year revenue growth rates, Amazon asserts that customers are finding new digital offerings Amazon has available, such as music, video, and Alexa, as part of its Prime membership, and that its platform becomes increasingly sticky.

Further, the more the consumers see benefits associated with Prime, the more frequent these customers shop, with the average basket size being larger, too.

Amazon contends that in a normal period, with this amount of revenue, Amazon would have cleared $4 billion of operating profit in Q2 2020 compared with $3.1 billion in Q2 2019. 

Indeed, Amazon declares that the best investment it can make is to reinvest this profit into COVID-related expenses to get products to customers and keeping its workforce safe. The message here is that Amazon plays a critical role in this troublesome time.

Mixed AWS Performance 

Amazon’s cloud platform increased its revenues by 33% year-over-year in Q1 2020. Given that AWS finished 2019 growing at approximately 37% compared with 2018, this marks a deceleration in a period where many of its rivals saw larger spikes in revenues, albeit from smaller bases.

For instance, Alphabet's  (GOOGL) - Get Free Report cloud segment saw its revenues increase by 52% year-over-year during Q1 2020, whereas Microsoft’s  (MSFT) - Get Free Report Azure increased its revenues by 61% compared with the same period a year ago.

During the call, Amazon’s CFO Brian Olsavsky pointed to Amazon’s large base, reminding analysts that Amazon’s AWS is now on an annual run-rate of $41 billion. Also, although certain sectors contracted, other areas were able to significantly offset that weakness, with strong performances in videoconferencing, gaming, remote learning, and entertainment.

Valuation - Still More Upside Potential

Amazon’s prospects are tied to global economic conditions. Thus, although Amazon’s AWS was not a star this quarter, there’s the belief that once certain affected industries, such as hospitality, travel, and indeed the whole economy reopens, that customers will continue to increase their use of AWS.

Indeed, Olsavsky said that AWS’ backlog of orders continues to build, and noted the demand for AWS now spans from millions of smaller start-ups to large enterprises, as well as the public sector.

Consequently, Amazon’s business continues to grow its revenues easily north of 20%, and possibly closer to 25% revenue growth rates, while its share price has only moved 17% this past year. Could it be that much of Amazon’s prospects are already priced in? I do not believe that to be the case. 

In fact, investors are only willing to pay 29 times Amazon’s trailing cash flows from operations, compared with 32 times its trailing cash flow seen on average over the past three years.

The Bottom Line

We are navigating through unprecedented times, and this marks a bumpy period for Amazon. Realistically, if anything, Amazon has been able to further outdistance itself from its retail competitors, while continuing to solidify its competitive advantages in the cloud.

Amazon continues to show no signs of slowing down. For now, investors are still not overpaying for Amazon. The company continues to grow its revenues at close to 25% and is priced at just 29 times trailing cash flow, making this stock a compelling investment opportunity.

Amazon is a holding in Jim Cramer’s Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AMZN? Learn more now.