Editors' Pick: Originally published Dec. 30.
Amazon has had an amazing run, but it doesn't look like it's over. Amazon continues to take market share from traditional brick-and-mortar retailers and has tightened its grip on American retailing.
Amazon and Costco (COST) - Get Report are very similar. Both companies put consumers ahead of profits. Just the other day, Amazon said more than 3 million people started a Prime membership over the holidays. While Amazon has never released the number of total Prime members or its retention rate, Amazon's retention rate might be somewhat similar to that of Costco -- at 91% -- since both companies work hard to keep consumers happy.
Over the last few years, growth at Costco and Amazon has slowed. For example, Costco had 14% revenue growth in fiscal 2011, and Wall Street predicts the company will report revenue growth of just 5% in fiscal 2016. Amazon has slowed too. In fiscal 2011, Amazon reported 40.5% revenue growth. For fiscal 2016, analysts estimate Amazon will grow just 21%.
That's why I still like Amazon. It's still growing at an incredible rate. Analysts think Costco will have revenue of $122.2 billion in fiscal 2016. Amazon should be able to do $130 billion. That's just an $8 billion difference, but a huge difference in growth (5% vs. 21%).
Amazon isn't setting the world on fire with megaprofits, but so far, wishing for profits has been a loser's game. In 2011, analysts thought Amazon would have operating income of $7.9 billion by 2015, not the $2.4 billion currently projected. And the valuation is nuts. But again, that's been a loser's game. The only thing Amazon investors care about is top-line revenue growth -- and Amazon has still got it.
While Amazon hasn't released the number of Prime members, some analysts think Amazon has as many as 70 million Prime members, which would be in line with the 83 million Costco members. Some estimates say that Prime members spend as much as $1,300 per year vs. $450 for nonmembers.
Of course, investors are still in love with the Amazon Web Services business. AWS is expected to produce revenue of $12 billion in 2016 and $18 billion the year after. While AWS only represents a fraction of Amazon's revenue, it is around 43% of Amazon's operating profit.
Analysts come up with all sorts of cockamamie methods to value Amazon, but I won't attempt it. As long as Amazon can grow its top line by double digits, the stock should continue to respond and go higher. It's just that simple. Amazon looks ready for an amazing New Year.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.