Don’t sell your Amazon stock yet, this fund manager says

Investors may be thinking now’s the time to cash in on those gains for Amazon (Amazon Stock QUote, Chart, News NASDAQ:AMZN), with the stock sticking above the $3,000 mark for much of the past half-year. But there’s more upside ahead, says portfolio manager Jamie Murray of The Murray Wealth Group, who argues that Amazon’s earnings will continue to grow well beyond the pandemic.

News is breaking on practically a daily basis about successful vaccine trials for COVID-19 as the world seemingly gets closer to starting the process of inoculating billions of people around the globe and, hopefully, ending both the pandemic and the economic and social strife that has followed in its wake.

And while some of the shifts brought about by COVID such as the move to work-from-home environments and the accelerated adoption of online commerce will likely have staying power beyond the pandemic, it’s unclear how that’ll affect market sentiment towards COVID benefactors like Amazon, which has seen its share price leap ahead in 2020, now up 67 per cent year-to-date.

But Murray says investors should be buying rather than selling AMZN, even with its gains this year. Murray says Amazon’s reach is now well beyond e-retail, with its pharmacy, cloud computing and advertising business likely to be huge growth drivers for the company going forward.

“Amazon is our third-largest holding in our global growth fund so it’s a company we really, really like,” says Murray, head of research at Murray Wealth, who spoke on BNN Bloomberg on Monday. “As the share prices has moved up over the past year we’ve been increasing our weighting in the portfolio, so we haven’t been trimming. We’ve just been letting it ride and then we’ve actually been adding to it around the $3,000 per share mark recently.”

“With Amazon it really comes down to the organization itself. It’s such an aggressive, well-run, high return organization. They moved into pharmacy this week and we think that’s going to be a long-term growth driver for them,” Murray said. “But the the big story for Amazon for us is the profitability you’re going to start to see coming through as its AWS, Amazon Web Service, its cloud division, starts to show improved growth and improved margins. That’s going to flow through to their the bottom line.”

Revenue from Amazon Web Service grew by 29 per cent year-over-year in the company’s latest quarter, its third quarter delivered at the end of October. There, AWS hit $11.6 billion in sales, although the segment’s growth rate has progressively diminished since Amazon first released numbers for AWS back in 2017. The growth rate was up to 49 per cent in early 2018 but has dropped steadily since. (All figures in US dollars.)

Amazon’s overall Q3 numbers were huge, though, with the company earning $12.37 per share on revenue of $96.15 billion, compared to analysts’ consensus estimates at $7.41 per share and $92.7 billion, respectively. Amazon’s topline was up 37 per cent compared to a year earlier.

“We’re seeing more customers than ever shopping early for their holiday gifts, which is just one of the signs that this is going to be an unprecedented holiday season. Big thank you to our employees and selling partners around the world who’ve been busy getting ready to deliver for customers this holiday,” said CEO Jeff Bezos in the third quarter press release.

Amazon is gearing up for the holiday season, starting with Black Friday in a few days, but perhaps the bigger news in the long run will be last week’s announced launch of Amazon Pharmacy, giving customers in the US the ability to order prescriptions for home delivery and free two-day shipping for Amazon Prime members.

The move has been years in the making, accented by Amazon’s $753-million acquisition two years ago of online pharmacy company PillPack. The timing seems right, as customers are more apt to use home delivery of medications during COVID rather than risk the trip to the drugstore, with Amazon hoping many will keep with its pharmacy services even after the pandemic is over.

A more aggressive Amazon is something that you always have to pay attention to,” said Jim Cramer, host of Mad Money on CNBC, speaking last Tuesday on CNBC. “The fact is we’re all now going to evaluate whether we shouldn’t be buying our pharmaceuticals [through Amazon].”

Murray says Amazon’s advertising business will be another growth engine.

“For some of these high margin, additional product lines now, Amazon’s advertising revenue is getting up into the tens of billions of dollars, and that all flows through the profit,” Murray said. “So you’re still getting tonnes of growth.”

“There’s going to be a little bit of a tough comp period in mid-2021 when you’re lapping this COVID period and will there be some slowdown in the growth rate then, but long term, this is just a beast of a company and we think it’ll continue to win share in all its markets,” Murray said.