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I've pounded the table for Amazon.com, Inc. (NASDAQ: AMZN ) for some time now - and I still think Amazon stock has more upside. Blowout gains following Q3 earnings sent the stock over $1,200 - but a recent pullback has sent the AMZN stock price down about 6% from those highs.
I don't see the dip as changing anything relative to Amazon's long-term outlook. I argued last month that Amazon should be the world's most valuable company. Although the stock has a long way to go to catch Apple Inc. (NASDAQ: AAPL ) from a market capitalization standpoint, I still think it can get there.
The short-term pullback isn't necessarily a surprise, given that the AMZN stock price had gained 60% this year. InvestorPlace columnist Tim Biggam even called the top late last month. But it's just a breather in the long march higher of Amazon stock. News surrounding the company continues to be strong, and opportunities for growth abound. The pullback in AMZN stock isn't a harbinger of future weakness - it's a buying opportunity.
Amazon Stock Fueled by Growth Opportunities
As Brad Moon detailed on this site, Cyber Monday sales set a new record - no doubt driven largely by Amazon. So aggressive was the buying that United Parcel Service, Inc. (NYSE: UPS ) is struggling to keep up with what it called an "unprecedented" surge in orders.
For all the talk about Amazon's supposedly bubbly price-earnings ratio - talk which I vehemently believe is misguided - the opportunity here is equally unprecedented. This is a company in its third decade of operations that is generating about $180 billion in revenue this year and growing those sales another 29% next year, according to Street estimates. The Cyber Monday numbers show that growth isn't slowing down any time soon.
Meanwhile, Amazon is working to find new areas for growth as well. The addition of Amazon Handmade offerings to the Amazon Prime platform challenges the dominance of Etsy Inc (NASDAQ: ETSY ) in that space. Amazon recently launched in Australia, where it has plans to take market share quickly.
It's true that stocks of brick-and-mortar retailers have rallied recently, which some observers have credited to those retailers better competing with Amazon. From here, however, those gains look like a "dead cat bounce." Amazon's dominance isn't going anywhere - in fact, it's expanding.
Amazon Spreads Its Reach
Beyond e-commerce, Amazon's reach is growing. In October, Luke Lango detailed the company's opportunity in video advertising , and it looks like ads should begin contributing materially to revenue and profits in 2018. Ad agencies are looking to increase their spend on the site, an effort to mitigate the dominance of Facebook Inc Common Stock (NASDAQ: FB ) and Alphabet Inc Class A (NASDAQ: GOOGL ) in the online advertising space. A new patent awarded to Amazon allows for viewers to see continually lower prices as they watch an ad.
Amazon still is working out the kinks from its acquisition of Whole Foods, which will offer a full year of contribution next year. Amazon Web Services is well ahead of rivals like Microsoft Corporation (NASDAQ: MSFT ) and Google. A recent win of business from TurboTax-maker Intuit Inc. (NASDAQ: INTU ) helps on that front.
And Amazon's ambitions in health care have yet to play out. The former CEO of Aetna Inc (NYSE: AET ) said that company's merger with CVS Health Corp (NYSE: CVS ) was driven in large part by Amazon fears. Rumors swirl about an acquisition in that space or in brick-and-mortar retail. Amazon Business continues to grow, including the launch of Alexa for Business.
Amazon Stock Is Not Overvalued
All that is going on for Amazon at a time when not that much is going on in the market as a whole. And that's just one of the many reasons I remain bullish on Amazon stock.
Yes, Amazon looks ridiculously expensive on a P/E basis. But, again, one data point (trailing earnings) isn't a suitable way to value a stock. Amazon is investing billions in future earnings opportunities. Margins are narrow; even modest improvement will lead to huge operating income growth. If Amazon chose to maximize profits now, those profits would be a significant multiple of what the company is reporting at the moment.
But it's not making that choice - because it simply has so many opportunities. To be sure, not all of them will work out, as even CEO Jeff Bezos has admitted. Some will, however. That, plus the company's still-impressive opportunity in its core e-commerce business, will keep growth coming for years - and will keep the AMZN stock price moving higher.
A small, short pullback doesn't change that fact. Amazon stock remains a buy.
As of this writing, Vince Martin has no positions in any securities mentioned.
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