3 reasons you should buy Amazon stock before there's a coronavirus vaccine

Forces independent of COVID-19 are driving Amazon's stock growth and will continue to do so.

| More on:
man in COVID-19 safe mask shops Amazon online to avoid coronavirus

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Without question, COVID-19 has made an impact across the economy, particularly with retailing. The contagion appeared to benefit companies like Amazon (NASDAQ: AMZN), simply because it allows for shopping while greatly reducing the risks associated with going to crowded stores.

Conversely, this might also create investor fears that a coronavirus vaccine could hurt the consumer discretionary stock as it could result in pre-pandemic buying patterns returning.

Such an occurrence may create questions about Amazon sales (and the potential effect it might have on the company's stock price) in the near term, but prospective buyers have three good reasons to ignore those worries and buy Amazon stock despite the concerns. 

1. Amazon's sales history

Indeed, consumer reaction to COVID-19 gave Amazon's retail sales a significant bump. In the second quarter of 2020, sales increased by almost 42% from the same quarter last year. This compares to the second quarter of 2019 when sales rose by around 18% from year-ago levels.

Investors should notice though that sales likely still increased without the help of a pandemic. The one benefit to these pandemic sales is that they have given Amazon a reprieve from potential sales growth slowdowns that could have occurred had the pandemic not happened. In 2019, the sales growth of its retail operations rose by 18.5% from year-ago levels. That was actually a slowdown from the yearly increases of approximately 29% in 2018 and 30% in 2017.

Hence, COVID-19 looks to have given Amazon's retail sales a temporary bump. And although sales growth rates may again fall below 20%, investors need to remember that double-digit sales increases will probably continue for a long time to come.

2. The power of Amazon Web Services

The retail sales figures referenced above are not directly related to activity from Amazon Web Services (AWS), its cloud computing unit. AWS is still a relatively small portion of the company's overall revenue, but AWS accounts for most of Amazon's profits.

At just over $10.8 billion in sales in the most recent quarter, AWS made up only about 12% of overall sales. However, thanks to high gross margins, its almost $3.4 billion in operating income accounted for more than 57% of the company's operating income.

Despite all of the talk about remote work moving tasks to the cloud, earnings growth dropped slightly. In the most recent quarter, revenue increased by about 29% over year-ago levels, a decline from the 37% year-over-year increase reported for AWS in the second quarter of 2019.

Nonetheless, investors should probably take the slightly slower growth in stride. According to the hosting platform Kinsta, AWS leads the infrastructure segment of the cloud computing industry. Also, Grand View Research forecasts that the cloud industry will grow at a compound annual growth rate of about 15% through 2027. AWS's growth far exceeds that rate, strongly positioning the company both now and after the pandemic ends.

3. Amazon is reasonably valued

Admittedly, calling Amazon "inexpensive" may seem outrageous, given its forward price to earnings (P/E) ratio of around 64. However, net income increased by 97% in the most recent quarter. Also, analysts project 38% profit growth for this year. In 2021, when most analysts expect the pandemic to have receded, they are forecasting a profit increase of 40%.

At $1.7 trillion, Amazon's market cap only lags behind that of Apple at the time of this writing. Normally, companies that size would struggle to produce high-percentage earnings increases.

However, as mentioned before, the relatively small percentage of revenue earned by AWS generates the majority of the company's profits. As long as this part of the company can maintain its high growth rate, Amazon stock should continue to benefit. Knowing this, it is little wonder why some analysts see a "massive upside" in Amazon.

Amazon has shown it can generate significant growth regardless of how coronavirus affects the company. Hence, those wanting to buy Amazon stock before a vaccine comes out have no reason to wait.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool Australia has recommended Amazon. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on International Stock News

A man looking at his laptop and thinking.
International Stock News

Why Alphabet stock was sliding today

Let's take a look.

Read more »

A man looking at his laptop and thinking.
International Stock News

Nvidia's stock was down despite its amazing earnings. Here's what history says is coming next

Although it might seem to defy logic, it's not an uncommon phenomenon.

Read more »

A woman holds a soldering tool as she sits in front of a computer screen while working on the manufacturing of technology equipment in a laboratory environment.
International Stock News

Nvidia share price slips despite 94% revenue growth

Q3 earnings beat expectations, but what about guidance?

Read more »

high, climbing, record high
International Stock News

Could the S&P 500 Index hit 6,500 by the end of 2025?

Could the index climb higher?

Read more »

a small child holds his chin with his head on the side in a serious thinking pose against a background of graphic question marks and a yellow lightbulb.
International Stock News

Is it too late to buy Nvidia shares?

Is Nvidia stock a buy ahead of its third-quarter earnings report tomorrow?

Read more »

a group of people stand examining a large glowing cystral ball held in the hands of one of the group members while the others regard it with various expressions of wonder, curiousity and scepticism.
International Stock News

Here's what to expect from Nvidia on November 20

Can Nvidia score another win?

Read more »

Two people lazing in deck chairs on a beautiful sandy beach through their hands up in the air.
International Stock News

2 no-brainer Warren Buffett stocks to buy right now

While replicating Buffett's success isn't possible, there are a handful of his investments that are no-brainer buys.

Read more »

A man with a beard and wearing dark sunglasses and a beanie head covering raises a fist in happy celebration as he sits at is computer in a home environment.
International Stock News

3 reasons to buy Nvidia stock before November 20

This week marks a big moment for tech investors as perhaps the most anticipated earnings of the year will be…

Read more »