Amazon: Bear or Bull After Disappointing Returns at the Start of the Year

Ecommerce is an increasingly more profitable market as more and more consumers opt to shop online and more and more small businesses find the typically lower overheads of running an online store front appealing. Although Amazon AMZN has declined around 13%  since the start of the new year, stockholders are still pleased with the company’s overall performance. It’s grown about 650% over the past 10 years which represents more than six times the growth of Nasdaq in the same period. With the price so high, is Amazon still worth buying?

Some anxiety among investors

Even while some decline is expected after falling short of earnings estimates, the rate of decline which Amazon has experienced is a bit steeper than we would expect, especially when you consider that Nasdaq overall only declined 1.3% over the same time period. This faster than usual downward momentum could be a signal of something more serious than simply missing the analyst’s earnings estimates.

On the other hand, it could be a result of a pessimistic market underrating the company’s potential. The price of a stock is all too often an imperfect representation of a company’s real strength and value. And this unusual decline could, instead, signal a great time to invest while the stock is selling at a bargain price.

Improved business even amid declines

While public opinion fell after news of the company missing its earnings estimates, Amazon’s profit margins continued to expand for the third consecutive year. Operations are getting increasingly more efficient while its low-cost, high-profit services such as digital media and the recently launched Amazon Workspaces platform are seeing a steady rise in sales. 

In mid-February, Amazon announced that it has created 2,500 full-time jobs which offer comprehensive benefits all across the United States. These new jobs come in addition to the more than 20,000 full-time jobs the company added over 2013. Such an aggressive hiring campaign is not only great for the struggling American economy but great for the long term success of the company as it will now be able to handle the added responsibility of expanding its Sunday delivery program which has already found success in places like New York and Los Angeles.

When it comes to product development, Amazon is poised to take advantage of its exclusive ownership of Liquavista and its completely unique screen technology. This competitive advantage could be the edge Amazon needs to finally make real strides in the tablet market and maybe even the smartphone market as well.

The company’s estimated $2 billion dollar Amazon Prime service has also become more competitive recently. Amazon was able to outbid its biggest rival in online streaming services, Netflix NFLX, for exclusive rights to stream Viacom’s children programming. This includes exclusive rights to popular shows like Dora the Explorer and SpongeBob SquarePants.

While analysts feared that the recent proposed fee hike for Amazon Prime membership would scare away too many current and potential subscribers, it’s important to realize that it will still be comparable to Netflix pricing.

Amazon and small businesses

Perhaps one of the biggest advantages Amazon has in the coming years can be found in its support of small business. As more and more companies choose to do the bulk of their business, if not all of it, online, the ecommerce market continues to expand. Amazon already sees its fair share of that increased traffic through its online marketplace.

With more and more resources out there to help encourage small businesses and online start ups, Amazon will have a distinct advantage in the changing economy as its online marketplace becomes host to a significant portion of these emerging entrepreneurs.

Conclusions:

Despite a slow and pessimistic start to 2014, Amazon still looks like an attractive stock with some room to grow and a strong business plan to make that growth happen. While we shouldn’t expect the rapid growth we see in smaller companies, we can still hope for faster than usual growth rates for companies of its size.