Amazon stock: Buy, sell, or hold going into 2021?

The e-commerce specialist's stock has gone nowhere since July. Is it time to buy?

| More on:

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.

Following an enormous run-up in Amazon.com Inc's (NASDAQ: AMZN) stock price during the first seven months of the year, shares have failed to gain any meaningful momentum since then. The stock is currently at the same level it was on 1 August 2020. Does the stock's underwhelming performance in recent months give investors a buying opportunity as we head into a year that may benefit from a reaccelerating U.S. economy as vaccines potentially begin suppressing COVID-19?

To answer this question, let's take a look at Amazon's business momentum and the growth stock's valuation.

Soaring sales and improved profits

2020 has undoubtedly been a spectacular year for Amazon. After wrapping up 2019 with 20% year-over-year sales growth, no one would have guessed the acceleration that would be in store for the company in 2020. First, second, and third-quarter revenue jumped 26%, 40%, and 37% year over year. Coronavirus-related lockdowns meant consumers all over the world flocked to the e-commerce company's website to order goods without having to leave their homes.

Importantly, however, the boost these lockdowns provided Amazon benefitted more than the e-commerce giant's top line. Trailing-12-month free cash flow for the period ending 30 September was $29.5 billion, up from $23.5 billion in the same period one year earlier. This occurred even as operating expenses surged as Amazon hired aggressively and incurred increased costs related to operating during a pandemic. Operating expenses for the nine-month period ending 30 September were $244 billion, up from $182 billion in the same period one year earlier.

Capturing how Amazon was able to demonstrate a scalable business even as expenses jumped, the company's trailing-12-month operating margin was 5.7% at the end of Q3. That compares to 5.4% at the end of the year-ago period.

Handling the coronavirus pandemic in stride, it's not surprising that the stock is up a total of 70% this year.

What about Amazon stock's valuation?

But has Amazon stock's big move higher during the first seven months of the year already priced in the company's strong potential over the long haul? Even more, are investors fully considering the risks of a possible significant deceleration in the company's top-line growth as the economy reopens and consumers resume some of their brick-and-mortar shopping habits?

Amazon stock certainly doesn't appear cheap at first glance. The company has a $1.6 trillion market capitalisation and trades at 92 times earnings. But here's what investors should keep in mind: analysts are convinced that there's still significant room for earnings-per-share (EPS) growth as strong revenue growth continues and the company's operating margin expands further. For instance, consider that analysts are currently modeling for Amazon to achieve earnings per share of approximately $63 in 2021 -- up from an estimated $39 in 2020 and about $23 in 2019. With revenue growing rapidly and Amazon's operating margin expanding, earnings could soar in the coming years.

Amazon stock: buy, sell, or hold?

So, is Amazon stock too expensive to buy? Not necessarily. Earnings per share growth like this suggests shares may be worth their current price tag.

Investors should still exercise caution when it comes to Amazon stock. 2020 was an unprecedented year in many ways. It's possible that in 2021 the e-commerce specialist has a tough time living up to strong year-ago revenue comparisons (thanks to lockdowns that boosted sales in 2020). Currently, analysts are modeling for 18% sales growth in 2021. If analysts are overly optimistic, however, the market could punish the stock. 

Despite this near-term risk, the company's strong business momentum and the impressive scalability its business model demonstrated in 2020 ultimately make the stock a buy at this level, in my opinion. For investors interested in buying the stock, it would be wise to keep the position small relative to the total value of their overall portfolio in order to help diversify away from some of the risks of any unforeseen challenges.

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

Should you invest $1,000 in Allkem right now?

Before you buy Allkem shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Allkem wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 30 April 2025

Daniel Sparks has no position in any of the stocks mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on International Stock News

Business woman with her arms folded stands in front of multiple screens.
International Stock News

How did the Magnificent 7 fare this reporting season?

Let's explore the highlights.

Read more »

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

Amazon: A good quarter but some concerns

Here's our initial take on Amazon's financial report.

Read more »

Man looks up at apple on his head.
International Stock News

Apple: Growth in a difficult environment

Here's our initial take on Apple's financial report.

Read more »

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
International Stock News

Why Microsoft stock popped this week

Microsoft stock was up by 9.5% this week.

Read more »

Electric vehicle such as Tesla being charged at charging station.
International Stock News

Tesla searches for Musk successor: Why this matters

Could Elon get the chainsaw from his own board?

Read more »

customers inside and outside a Microsoft retail store
International Stock News

Microsoft shares earnings report: What's the verdict?

Investors moved the Microsoft share price significantly.

Read more »

Warren Buffett
International Stock News

Countdown to Berkshire's AGM: What do investors expect to hear from Warren Buffett this year?

All eyes will be on Omaha, Nebraska this weekend.

Read more »

A smiling woman holds a Facebook like sign above her head.
International Stock News

Meta surges on blockbuster earnings report

It's a good day to be a Meta investor.

Read more »