Amazon (NASDAQ: AMZN) is one of the few companies that actually benefitted from the pandemic. For evidence of this, look no further than the cost of Amazon shares, which quickly skyrocketed a mind-melting 40% in just three months.
But with Amazon shares now trading for more than US$3300 each, I believe that they are simply too expensive for an average investor to take a risk on, especially when the possibility of a stock market crash is just around the corner.
The case for Amazon
At this point, Amazon is so ubiquitous in our lives that it barely needs explaining. However, for the uninitiated, it is an online retail company that functions both as a marketplace for its own consumer products and private sellers wishing to reach a wider customer base.
Although Amazon shares have a price-to-earnings ratio of 58:67 (a little high for my liking), the company has a market capitalisation of $1.7 trillion, gross profits of over $100 billion a year, and revenues that have increased steadily by an average of 30% each year since 2018. But unlike many other companies, it doesn’t use these profits simply to enrich its shareholders and instead focuses on reinvestment and growth, either through the development of new products or through acquisitions.
Amazon now owns or partly owns more than 100 other companies across multiple industries, such as Tech, Food, Media and Medicine, so when you buy Amazon shares, you get exposure to all these sectors. It has even branched out into the subscription business model through its Prime delivery service.
The only real risk I see to Amazon’s long-term growth would be a forced break up by the U.S Government but, given how business-friendly the major political parties are, I view this as unlikely.
Why wait for a crash?
If the company’s fundamentals are as good as this, why should I wait to buy Amazon shares? Well, it has to do with the sheer amount of borrowing that has taken place over the last 18 months. With interest rates as low as they have been, institutional investors have been taking on debt like there’s no tomorrow and putting all that borrowed capital into the stock market. This has caused a speculative mania around the world, causing most markets to put in new all-time-highs every few months.
However, it is my opinion that this uptrend is unlikely to continue much further. Interest rates will have to go up to counter inflation and when they do, institutions that bought shares back in March and April of 2020 will see that it’s time to cash out. I do not want to buy the top and be left holding the bag when the bottom drops out.
It can be hard to sit on the side-lines as a stock’s share price continues going up and up. But if I remain patient, a crash represents a great opportunity to buy valuable shares at discounted rates. With fundamentals as strong as these, Amazon shares are definitely the first thing I will buy when the stock market has its next downturn.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Reynolds does not have a position in any of the shares mentioned. The Motley Fool UK does not have a position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.