The retail industry is gearing up for the holidays with another season of blockbuster sales and promotions. But while you've been shopping for loved ones, investors have been making a list of stocks that stand to gain the most from holiday cheer — and you better believe they're checking it twice.
After Years of Pumping Profits Back into the Company, Amazon's Earnings are Surging
At the top of Barron's "Nice List" this year is Amazon.com Inc. (AMZN), which accounted for about half of all e-commerce sales on Thanksgiving and the day after in 2017. According to the publication, the e-commerce giant may just be Black Friday's best bargain this year.
Shares of the global technology behemoth have suffered amid a broader market sell-off that has weighed heavily on some of this year's best-performing companies. After briefly becoming the second U.S. corporation to surpass $1 trillion in market capitalization earlier this year, Amazon landed among its FAANG peers in correction territory.
Closing down 1.1% on Tuesday at $1.495.46, Amazon stock reflects a 27.1% loss from its 52-week high of $2,050 in August. Despite recent weakness, the stock still reflects a 27.9% return YTD compared to the S&P 500's 1.2% decline and the tech-heavy Nasdaq Composite Index's modest 0.1% increase.
Barron's noted that Amazon has pumped nearly all of its profits back into its business to expand into new markets such as brick-and-mortar retail, entertainment streaming, pharmaceutical services, and grocery delivery. That means Amazon has foregone "meaningful net income for years as its sales ballooned." This trend led to smaller profits for Amazon while its share price surged, causing some skeptics to warn against its high-flying valuation. Amazon stock grew at a compound annual growth rate of 44% over the past decade, while its price-to-forward-earnings multiple has averaged a whopping 181.5 over the past five years, compared to the S&P 500's average ratio of 22.2 over the same period.
According to Barron's, however, a shift is occurring at Amazon. The past four quarters have been the most profitable for Amazon, while its top-line growth has decelerated. On the back of weaker-than-expected revenue and fourth-quarter outlook from the Seattle-based tech titan in the recent quarter, investors sold-off shares. While Amazon's stock price numerator (P) falls and its earnings denominator (E) mushrooms, its multiple has shrunk to reflect a much cheaper play.
After a series of sell-offs, Amazon shares now trade at 61.3 times projected 2019 earnings, about one-third of its average multiple over the past five years.