Our Amazon Stock Prediction In 2019 (Buy or Sell?)

Amid the hoopla this week over the MLB All-Star Game, you probably think baseball is the national pastime. Nope. It’s shopping.

America’s love affair with shopping just might sustain this aging bull market a bit longer. The markets have decided that the U.S. is headed for a recession, but no one told consumers.

The resilience of consumer spending is good news for e-commerce giant Amazon.com (NSDQ: AMZN). But there are plenty of worrisome signs for retailers as well. Below, I sort out the good news/bad news scenario to see what it means for Amazon’s shareholders.

Negative trends suggest that consumers should be in retreat right now. Global economic growth is sputtering. In the U.S., manufacturing activity and construction spending are slowing. Strife is intensifying in the Middle East and the U.S.-China trade war shows no signs of abating.

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However, despite the turmoil, the American consumer is hanging tough and remains in a mood to spend.

As reflected by robust retail sales in May, the U.S. consumer is unfazed by the trade war and other risks. Amazon and its retailing rivals seem to enjoy tailwinds right now.

On Monday, July 15, Amazon will launch its annual “Prime Day,” a 48-hour global shopping extravaganza of special deals designed to get people to sign up for Amazon Prime and open their wallets for a burst of spending. Prime Day 2019 will probably repeat its success of past years.

But some investors are getting nervous about retail in general and Amazon in particular. The consensus on Wall Street calls for an economic slowdown, a corporate earnings recession, and maybe even a bear market.

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Read This Story: Do The Math! The Numbers Don’t Add Up

Some investors are given pause by the messy Bezos divorce. MacKenzie Bezos won $38.3 billion worth of Amazon stock in her divorce settlement with Amazon founder and CEO Jeff Bezos. The divorce was finalized last week by a judge.

The highly public divorce resulted from reports this year that Bezos and his mistress had exchanged nude selfies. (Another reminder, in case you needed one, that “sexting” is a bad idea.)

The Bezos divorce settlement is the biggest in history, making MacKenzie the fourth richest woman in the world. Not surprisingly, MacKenzie is reportedly getting bombarded online with dating proposals.

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But as I’ve often counseled readers, tune out the white noise of daily headlines and focus on the fundamentals. In our short attention span society, the Bezos divorce soon will be forgotten (although maybe not by Jeff).

And don’t shed too many tears for Jeff Bezos. He remains the richest man on the planet, with a post-divorce net worth of $170 billion.

It all begs the question: what do these trends mean for Amazon in 2019 and beyond? Should you buy or avoid AMZN shares? The stock has enjoyed a stellar run; maybe it’s due for a breather. Let’s find out.

Table of Contents

What Is Amazon?

When I think Amazon, only one word comes to my mind.

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Disruption.

To “disrupt” means “to disturb or interrupt the ordinary course.”

Jeff Bezos prides himself on disrupting the status quo. (He certainly disrupted his private life.) Seattle, Washington-based Amazon has disrupted the way books are sold, published, and consumed, the way market share is earned, and the way customers shop for tangible goods globally. Bezos’ profound affect on the development of global e-commerce can’t be understated.

Bezos left a lucrative job as a Wall Street analyst in 1994, after reading projections that web commerce would grow for the rest of that decade at an astonishing annualized rate of 2,300%. He formed a business plan to build an online commerce store with the ambitious goal “to sell everything, to everybody.”

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Amazon was launched in July 1995 and since then, it has proved itself one of the greatest success stories of all time.

Fortune magazine in 2012 called Bezos “the ultimate disrupter”— with good reason.

Bezos turned the book industry on its ear when he started Amazon from his garage. Since then, Amazon has grown far beyond books, forcing traditional retailers to rethink their entire online approach.

The company has never been afraid of embracing revolutionary technologies to slash delivery times and undercut the competition.

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Amazon is now the world’s largest online retailer, selling tangible products from A to Z. Amazon also has pioneered the innovative development of electronic devices and is a major global provider of web-based infrastructure and cloud computing services. Amazon’s market cap currently hovers at $993.2 billion.

Amazon cleared $258.2 billion in U.S. retail sales in 2018, which works out to 49.1% of all online retail spending in the country, up from a 43.5% share the previous year. In 2018, Amazon commanded 5% of all retail sales and the company’s e-commerce sales jumped 30% on a year-over-year basis. The company is on track for a similar growth trajectory in 2019.

Bezos’ strategic vision can be broadly separated into three fundamental tenets, each of which provides a prism to view past, present and expected future events in Amazon’s history. Within these tenets are powerful lessons for entrepreneurs (and investors) who strive to be in Bezos’ league.

One of the most insightful writings about Bezos’ vision and management philosophy is his first shareholder letter to Amazon’s investors in 1997. In this letter, Bezos revealed how Amazon had succeeded and how he intended to ensure continued success.

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Bezos wrote: “We will continue to make investment decisions in light of long-term market leadership considerations, rather than short-term profitability considerations or short-term Wall Street reactions.”

This concept of long-term investing has been a constant philosophy for Bezos since Amazon’s inception.

Bezos discusses his three tenets in this recent interview.

I’ve been closely following Amazon ever since its initial public offering on May 15, 1997. Back then, what did Amazon sell? Just books. Really. Nothing but books. The Internet was a nascent technology. The term “e-commerce” didn’t even exist.

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Today, the company’s quarterly sales are higher than the entire book industry’s annual sales were when Amazon went public.

Every quarter, I’ve come to expect massively impressive numbers from Amazon. I’ve never been disappointed.

Since 1997, I’ve watched Amazon’s revenue double, triple, and quadruple.

How Has Amazon Stock Performed?

Amazon shares have consistently outperformed, beating the broader market as well as its sector:

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  • Year to date, AMZN has gained 34.3% vs. a gain of 19.4% for the S&P 500.
  • Over the past 12 months, AMZN has gained 14.9% vs. a gain of 7.9% for the S&P 500.
  • Over the past two years, AMZN has gained 96.6% vs. a gain of 21% for the S&P 500.
  • Over the past five years, AMZN has gained 462.4%, vs. a gain of 51.3% for the S&P 500, and a loss of 0.5% for the benchmark SPDR S&P Retail (XRT). See stock price chart:

How Has Amazon Stock Performed In 2017/2018?

  • In 2017, AMZN gained 55.1% vs. a gain of 19.4% for the S&P 500.
  • In 2018, AMZN gained 24.7% vs. a loss of 7.5% for the S&P 500.

Why Has Amazon’s Stock Gone Up?

A large measure of Amazon’s growth has been driven by the loyalty of its Prime customers, who pay an annual fee in return for “free” shipping on all purchases.

The company’s Prime Member base exceeds 100 million. For context, consider that the entire population of the U.S. is 330 million. Even with the huge number of Prime Members, there’s further potential for expansion.

No industry is safe from Amazon’s ambitions. Consider the grocery business.

In a splashy deal in 2017 that captured the imagination of the financial press, Amazon purchased Whole Foods Market for $13.7 billion.

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Admittedly, Whole Foods is infamous for inflated prices. The health food chain’s nickname among consumers is “Whole Paycheck.” Amazon management has pledged to reduce prices.

However, the Whole Foods deal itself was a bargain for Bezos. The buyout represented less than 3% of Amazon’s then-market cap of $475 billion. Whole Foods commands a high-income, highly coveted clientele.

The purchase of Whole Foods was the biggest acquisition Amazon has ever made — so far. The announcement sent waves of fear throughout retail in general and grocery chains in particular.

For Amazon, gobbling up Whole Foods’ stores gave the digital retailer hundreds of physical locations and a substantial presence in the vast market for everyday consumer staples that are repeat purchases.

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Amazon’s integration of Whole Foods continues apace, with discounts for grocery buyers who also are Prime Members.

Who Are Amazon’s Rivals?

Amazon’s chief rivals are the “Big Box” bricks-and-mortar legacy retail chains.

Walmart (NYSE: WMT)

With a market cap of $323.6 billion, Walmart operates about 11,350 stores and clubs in 27 countries. The retail chain continues to expand into the online and mobile marketplace to attract bargain-minded shoppers.

Based in Bentonville, Arkansas, Walmart offers a slew of services in addition to its e-commerce platform. Walmart also operates a mobile payment platform, Walmart Pay, which provides discounts and other deals. Walmart is making the adjustment to e-commerce and taking the fight to Amazon.

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Read This Story: Our Walmart Stock Prediction In 2019 (Buy or Sell?)

Target (NYSE: TGT)

Based in Minneapolis, Minnesota, Target sports a market cap of $44.3 billion.

With a current physical store count of about 1,830, the Target chain offers a wide range of products and services similar to Walmart’s, including beauty and baby care products, apparel, food, jewelry, shoes, home furnishings, lighting, kitchenware, small appliances, home improvement products, automotive parts and accessories, music, movies, books, computer software, sporting goods, toys, and electronics.

Read This Story: Our Target Stock Prediction In 2019 (Buy or Sell?)

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Best Buy (NYSE: BBY)

Headquartered in Richfield, Minnesota, Best Buy operates about 1,500 retail stores that sell a wide variety of electronic gadgets, consumer technology products, household appliances, and sporting goods in the U.S., Canada and Mexico.

With a market cap of $19.2 billion, Best Buy also provides services such as consultation, installation, repair, and technical support.

Read This Story: Our Best Buy Stock Prediction In 2019 (Buy or Sell?)

Will Amazon Go Up In 2019 (Should You Buy)?

It’s a tough question to answer, but Amazon’s most recent foray into technological disruption (the boldest yet by Bezos) might deliver on some real gains in 2019 and even beyond into 2020.

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How?

Delivery by unmanned drones.

Drones are disrupting both the commercial and military worlds. Civilian uses of drones are proliferating, from law enforcement surveillance to pipeline inspection to agricultural spraying. At the same time, the Pentagon is embracing drones for combat in far-flung regions around the world.

Amazon’s service, called Amazon Prime Air, remains in the testing phase. Once a customer places an order, Amazon’s drones would pick it up and initiate flight from a warehouse in the customer’s area.

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Each drone would carry packages of up to five pounds, a weight that includes nearly 90% of Amazon’s orders. Flights would have a range of about 10 miles and delivery would take about 30 minutes. Bezos expects the company’s drone service to be operational in about five years.

Drones are apart of Amazon's future plans for increased price

Can Rivals Slow Amazon’s Stock Growth in 2019?

Amazon has clobbered the sales of Big Box and bricks-and-mortar retailers. Legacy retailers are trying to fight back, with a measure of success, but Amazon’s dominance appears unassailable.

Walmart is spending hundreds of millions of dollars to gobble up online retailers. The chain has created a patchwork of smaller online specialists.

But it’s unlikely that Walmart will ever outpace Amazon. That’s because at its core, Walmart isn’t a technology company. Walmart is a traditional retailer trying to adopt technology. That’s insufficient for the chain to entice the best software developers. Staying ahead of the technological curve will get increasingly difficult.

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The same truisms apply to Target and Best Buy.

Yes, just like Walmart, retailers Target and Best Buy have enjoyed some success in driving earnings and revenue, by redesigning their stores and enhancing customer service. They’ve devoted greater resources to beefing-up their online presences. But the three chains remain wedded to their physical stores.

It’s true, many consumers prefer an offline shopping experience. This behavior keeps afloat such legacy retailers such as Walmart, Target and Best Buy.

Indeed, Amazon’s acquisition of Whole Foods shows that Bezos believes that offline retail remains important. With the Whole Foods acquisition, Amazon picked up 473 Whole Foods locations.

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That’s why in 2019 and beyond, we’re likely to see Amazon purchase more and more of its offline rivals and integrate them into its existing e-commerce ecosystem, the way it has with Whole Foods.

Which brings me to CVS Health (NYSE: CVS) and Walgreens Boots Alliance (NYSE: WBA), the number one and number two drug retail chains, respectively.

What About Amazon Acquiring Pillpack?

Nowadays, to trigger a panicky sell-off in an entire business sector, Bezos merely needs to threaten invading it.

Grocery chain stocks plunged when Amazon bought Whole Foods. Drug retail chains CVS and Walgreens Boots Alliance have similarly fallen victim to the so-called “Amazon Effect,” as Amazon enters the online prescription pharmacy business.

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In June 2018, Amazon announced its acquisition of PillPack, an online pharmacy retailer that’s licensed to ship prescriptions in 49 states. The news initially weighed on the shares of CVS and Walgreens. But a logical move would be for Amazon to absorb rather than go head-to-head with the drug retail leaders.

A mega-cap stock such as Amazon can have difficulty devising effective ways to “move the needle.” The bigger the market cap, the harder it becomes to rack up market-thumping share price appreciation. However, strategic acquisitions of competitors would provide Amazon with clear catalysts for profit growth.

Amazon has total cash on hand of $37 billion (most recent quarter). That’s an impressive war chest. Future acquisitions are in the cards.

Will Amazon Go Down In 2019 (Should You Sell)?

In any credible stock prediction analysis, it’s important to play devil’s advocate and argue both sides of the coin. Let’s examine the bear side.

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The major bear argument right now is that Amazon is too pricey.

The naysayers say that the stock’s valuation is too high compared to the company’s growth prospects.

To be sure, Amazon sports a high valuation, if measured by the traditional yardstick of the price-to-earnings (P/E) ratio. The firm’s forward P/E stands at 52.7, compared to 17.7 for the S&P 500, 22.3 for WMT, 13.6 for TGT, and 11.9 for BBY.

So yes, it is high…

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…but profit expectations are high, too.

The consensus expectation of analysts who follow Amazon is for the company to rack up year-over-year earnings growth of 35.6% in the current year and 40.1% next year. Earnings growth is expected to come in at 94% over the next five years, on an annualized basis.

Our Overall Amazon Forecast and Prediction For 2019

There’s one aspect of Amazon that bodes well for the future: its ability to convert existing in-house capabilities into new profit streams.

Notably, Amazon Web Services (AWS) represents the exploitation of an internal system that the larger company needed to facilitate its e-commerce business. AWS now dominates the exploding cloud industry and generates most of Amazon’s profit.

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Since its inception, Amazon has proven to be a nimble giant. Expect more of the same for the rest of this year and beyond.

Amazon isn’t a deep bargain. But it’s still a compelling buy in a stock market where compelling buys are getting harder to find.

John Persinos is the managing editor of Investing Daily.