Social isolation has raised the demand for consumer staples, healthcare items and home entertainment. Global stock Amazon.com Inc. stands to profit from these trends.
Amazon.com (NDQ—AMZN) has performed much better than the overall market in the setback caused by the coronavirus. Since its high of February 19, this blue chip stock is down just 10.3 per cent. The S&P 500, by contrast, has dropped 23.7 per cent since it reached a high on February 20.
Amazon has held up relatively well in the bear market because it has quickly become indispensable. As more and more people self-isolate at home, they need to order the necessary consumer staples to maintain household operations. And Amazon is well suited to delivering such necessities, although it is having a tough time fulfilling this role, given the impact of the coronavirus on its employees.
Amazon serves consumers through its online and physical stores, with a focus on selection, price and convenience. Customers access the company’s offerings through its websites, mobile apps, Alexa devices, streaming and physically visiting its stores. It seeks to offer customers low prices, fast and free delivery, easy-to-use functionality and timely customer service.
Amazon supplies necessities
To meet customers’ essential demands, Amazon has limited the delivery of consumer discretionary items in favour of healthcare and consumer staples products, such as groceries, toilet paper and hand cleaners. Plus, it plans to hire 100,000 new workers to help it deliver these items.
Amazon also offers Prime Video, a streaming service that offers tens of thousand of movies and TV episodes including the company’s original content. This type of service is ideal for people cooped up in their homes looking for something to do.
While Amazon stands to benefit from the surge in demand for consumer staples and perhaps its streaming service too, its cloud computing services are not expected to be significantly impacted by the coronavirus. To sum up, among internet stocks, the company is thought to be among the least vulnerable to a recession brought on by the coronavirus.
Revenue growth rate, EPS to decline
Mind you, Amazon is not immune to the unfolding economic downturn. As noted above, the coronavirus is having a negative effect on its employees, limiting the company’s ability to keep up with consumer demand. At any rate, the downturn is bound to adversely affect revenue and earnings growth.
In fact, analysts are busy cutting their forecasts. Forecasting in these fast-changing and unprecedented conditions is difficult. So treat estimates with more skepticism than usual.
That said, Amazon’s revenue is forecast to rise by 14 per cent in 2020, down from growth of 21 per cent in 2019. But earnings per share are expected to slip only 1.3 per cent to $22.70 in 2020, down from $23.01 in 2019. EPS growth in 2019 was 14.2 per cent.
Amazon trades at 86.5 times the $22.70 a share it’s expected to earn. That’s a high multiple, but justified in our view because of the company’s strong, steady growth prospects over the next few years. Amazon.com is a buy for growth and income.
This is an edited version of an article that was originally published for subscribers in the April 10, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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