Amazon (AMZN) is a leading e-commerce business with $482 billion in annual online gross merchandise volume. The company also has a rapidly growing and highly profitable cloud computing, storage, and database business (Amazon Web Services) as well as a few other smaller businesses, including advertising, Whole Foods grocery stores, and a cobranded credit card. While AMZN is considered a global mega cap with a market capitalization of over $1.6 trillion, the vast majority (73%) of its non-Amazon Web Services revenue comes from the United States. (See Amazon stock analysis on TipRanks)

AMZN’s retail business model is based on its user-friendly e-commerce website and massive product offering. Its competitive advantage is enhanced by its competitive pricing and fast, low-cost or even free shipping. Furthermore, the enormous volume of customers that frequent its e-commerce website enables it to attract a large number of third-party sellers, from which it earns host fees.

Amazon also sells advertising space on its website and further monetizes its network through Amazon Prime: a subscription that offers members enhanced free rapid delivery services, discount opportunities at Whole Foods stores, and access to a large library or streaming and music services.

Thus far, the results have been terrific as revenue has exploded by 940.6% over the past decade. Since its IPO, the stock has generated total returns that exceed the S&P 500’s by nearly 250-to-1,.

Mitigating Factors

Despite its strong growth, the company has run into some recent headwinds. First, it faces regulatory concerns, including the risk of anti-trust lawsuit. Secondly, its retail business is in a race-to-the-bottom for margins, as heightened delivery expectations from consumers make online retail increasingly competitive and expensive. Thirdly, the company is now being forced to consider entering new industries and international markets to keep its growth engine humming at a strong clip.

Story continues

While it has proven over and over that it has an effective growth model that can be adapted to new industries, there is concern that the company has already grabbed much of the low-hanging fruit and has already entered the industries that are easily disrupted. Additionally, investors worry that the company may be competing on too many fronts to be truly effective.

Valuation Metrics

Despite these headwinds, AMZN still possesses considerable competitive advantages due to its exemplary brain trust, proven growth model, massive customer network about which it possesses immense sums of data, and an enormous Amazon Prime subscriber network.

The EV/Forward EBITDA still looks a bit high at 20.7x and the Price to Forward Normalized Earnings also appears high at 65x. However, the company’s numerous competitive strengths and expected continued strong revenue growth (26.9% in 2021 and 17.8% in 2022) and earnings-per-share growth (31% in 2021 and 31.7% in 2022) make it actually look very reasonably priced.

Wall Street’s Take

From Wall Street analysts, AMZN earns a Strong Buy in the analyst rating consensus, based on 31 Buy ratings in the past 3 months. Additionally, the AMZN stock price target of $4295.17 puts the upside potential at 33.96%.

Chart Description automatically generated

Summary and Conclusions

AMZN has grown to a size where it faces mounting regulatory as well as industry challenges to its long-term growth outlook.

That said, the company has numerous exceptional competitive advantages and strong short-term growth prospects.

Last but not least, the stock’s price looks potentially compelling as a growth play and analysts are overwhelmingly bullish on the company.

Disclosure: On the date of publication, Samuel Smith had no position in any of the companies discussed in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.