The major indices are all trading significantly lower at midday as stocks gave back a large chunk of their intraday gains from yesterday in the first hour of trading. Tech stocks and the Nasdaq once again led the way lower this morning, while the Dow has been showing relative strength in the volatile environment. Corporate earnings were a mixed bag in pre-market trading with American Express (AXP) and Lockheed (LMT) delivering very strong reports, Verizon (VZ) providing bullish guidance, but GE (GE) Johnson & Johnson (JNJ) missing on their top lines.
Stock Pick Summary:
As the panic selling continues to decimate the market, we are happy to keep accumulating top stocks for the best long term outcomes. Today, we continue building our position in a stock that needs little mention, the tech giant, Amazon (AMZN)!
Revenue should begin to accelerate in the second quarter as costs ease back. Further gains could come as it boosts sales in the grocery, apparel, accessories, and the furniture and appliances sectors, all while selectively increasing prices. Already, the company has raised fulfillment fees by 5%, a move that could add an additional $3 billion in 2022. The giant will likely lead the positive outlook on e-commerce for the next three to five years and growth in Amazon Web Services cloud business. Amazon’s subscription segment has reported trailing twelve-month revenue of over $30 billion. Subscription business provides Amazon with a steady, recurring revenue base which it can invest in other high growth services and could propel AMZN stock higher.
Despite expected headwinds from the reopening themes and tougher comps, we want to look ahead for long term rewards. We want to focus on 2 key growth elements:
AWS - While AWS accounted for only 13.1% of Q2'21 revenue, the segment was the main operating profit driver for the company as it accounted for 54.4% of Q2'21 total operating profits. Importantly, AWS's operating margins have also been largely consistent over time, and therefore investors could continue to depend on this vital segment to continue powering operating profits for the company. AWS is operating in a fast-growing market where it's the current market leader, and there is ample space and opportunities for the leading players to continue expanding. The public cloud market is expected to continue growing quickly from $270B in 2020 to $397B by 2022.
Ad Revenue - Amazon's digital ad revenue segment has been the company's fastest-growing segment for the last 3 years. In Q2'21, this segment continued its rapid run as ad revenue grew by 87.4% YoY and 14.6% QoQ. Within this segment, Amazon derives about 88% of its business from the e-commerce marketplace. The digital ad market is extremely lucrative. In the US alone, the digital ad market is expected to continue growing fast from $152.25B in 2020 to $278.53B by 2024. So there are a lot of reasons to expect Amazon to continue growing rapidly within this huge market and capture even more market share.
With the US e-commerce penetration rate still in the low-teens, we think Amazon's e-commerce growth has plentiful years of outperformance ahead and hence we are happy to continue building our position in it.
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