Amazon (NASDAQ:AMZN) is one of the most successful companies in the world. The company has been growing rapidly for years, and is a leader in e-commerce, cloud computing, and AI. It has had a great 2023 so far, but are Amazon shares still worth considering?
There are not many companies that fall into the ‘many companies within one’ description, but Amazon certainly does. The company’s campus in Seattle is now so large it has its own zip code. Investors in previous years have been rewarded for the growth of the e-commerce sector. But is Amazon just scratching the surface of other potential income streams?
How’s growth looking?
As we probably all know, the company has a strong track record of growth. Amazon’s revenue has grown by an average of 20% for the past five years. Growth is being driven by the increasing popularity of e-commerce, as well as expansion into new markets.
Amazon has a dominant market share in e-commerce. The company controls about 40% of the US e-commerce market. This gives it a significant advantage over its competitors, such as Walmart and eBay.
Most interestingly, Amazon is investing heavily in new growth areas, such as cloud computing, artificial intelligence, and healthcare. These are all fast-growing industries, and Amazon is well-positioned to capitalise on this growth. With over 2bn hits on the homepage in the last six months alone, launches of new products are well known, and readily adopted.
As a result of these new high-margin sectors, analysts expect the earnings of Amazon to grow by an impressive 31% over the next five years. This is far above the market average of 16%.
What’s the catch?
Of course, there’s never a sure thing in the market. With companies the size of Amazon, issues around regulation and competition are never far away. The fundamentals of a company growing so quickly also need to be carefully considered.
The price-to-earnings (P/E) ratio of 109 times is more than double the average of the e-commerce sector at 39.4 times. A ratio calculated on the forecast earnings growth of 56.4 times would seem more reasonable. This suggests that growth has been priced in, and any disappointments could lead to investors questioning their ownership.
The company is also facing increasing competition from other international e-commerce retailers, such as Alibaba, MercadoLibre, and JD.com. With these companies having much smaller P/E ratios than Amazon, investors may choose to look elsewhere.
The expected return on equity (ROE) is also rather low at 7.8%. This suggests that that less is being done to improve operations. With e-commerce shares typically being cyclical, meaning that recessions often lead to a decline, now may be a difficult time to turn this around.
Am I buying?
I believe that Amazon as a company is going nowhere any time soon. The user base is loyal, and the platform is best in class. Amazon shares, however, have been on such a terrific run that I feel there is less potential ahead. There may be tremendous growth ahead for rapidly evolving technology in AI. However, with the hype of technology stocks in 2023, and uncertainty in the wider economy, I will not be buying Amazon shares.
