Buy Amazon.com while it’s down

Amazon.com’s shares have pulled back much more than the market has over the past month or so. But aggressive investors who can tolerate stocks with above-average volatility may find the shares offer a more attractive entry point now they’ve been beaten down.

Amazon.comMomentum stocks are great to own when markets are climbing. But they can test your patience when stocks run into rough periods. Take Amazon.com, for example. While the market-capitalization weighted S&P 500 Index (see below) rose eight per cent in the first nine months of this year, Amazon’s shares soared 71 per cent over the same period.

But since early October, US stocks are now down about six per cent. And what led markets up for most of the year also led them down in the pullback. Among them, Amazon fell 19 per cent.

Amazon.com, Inc. (NASDAQ—AMZN) is one of the world’s largest online retailers. The company operates in three segments: North America (60% of 2017 sales), International (31% of sales) and Amazon Web Services (9%).

Despite the poor performance of its shares this past month or so, the company’s fundamentals remain sound, and profits have soared this year. For the nine months ended Sept. 30, 2018, Amazon made $7.9 billion (all figures in US dollars unless otherwise noted), or $14.10 a diluted share, compared with $517.7 million, or $2.02 a share, in the same period of 2017.

Sales are up by double-digits

Sales rose 37 per cent to $117.4 billion. Changes in foreign currency exchange rates positively impacted sales by $2.1 billion.

North American sales increased 41 per cent to $68.8 billion, thanks mostly to increased unit sales, including sales by third-party sellers, and the impact of the acquisition of Whole Foods Market, which was acquired in 2017. Increased unit sales were driven largely by Amazon’s continued efforts to reduce prices for its customers, including from shipping offers, increased stock inventory availability and increased selection.

International sales rose 24 per cent to $36.2 billion for the same reasons that North American sales increased, excluding the impact of Whole Foods.

The outlook for Amazon remains positive. The online retail industry continues to grow rapidly and take business away from traditional bricks-and-mortar retailers. And with just over 10 per cent of the retail market in online hands, companies such as Amazon have a lot more market share available to exploit. Plus, the company undeniably occupies a commanding position in online retail.

Amazon’s shares trade at 42 times forecast 2018 earnings of $19.80 a share. This is a high multiple, but not necessarily excessively so, given the company’s compound annual growth rate in earnings per share of more than 100 per cent these past five years.

Amazon.com is a buy if you can tolerate high volatility and you want long-term growth.

Market-cap indexes

The S&P/TSX Composite Index and its US counterpart, the S&P 500, are market-capitalization-weighted indexes. That means that the individual weighting of each stock in the indexes is determined by its market capitalization. A company’s market capitalization is simply its share price multiplied by the number of shares outstanding.

Amazon.com’s share price is about $1,700, and it has 488,969 thousand shares outstanding. Multiply these two figures, and you arrive at a market capitalization of about $830 billion. This is the third-largest market capitalization of all the 500 companies on the S&P 500. Amazon accounts for 2.9 per cent of the weighting of the index, behind Apple at four per cent and Microsoft at 3.5 per cent.

You can either buy Amazon directly, or indirectly by obtaining exposure to it through an index exchanged-traded fund (ETF), such as iShares Core S&P 500 Index ETF $275.50 (NYSEARCA—IVV). The advantage of choosing the latter is you get diversified exposure to the US large-cap market and you limit your exposure to any one security, such as Amazon.com.

This is an edited version of an article that was originally published for subscribers in the November 16, 2018, 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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