Amazon (AMZN) shares were my top pick for 2018, and even after the sharp pullback this past November and December, the shares finished 2018 up more than 25%, albeit well off their highs for the year. Despite that year-end swoon in the share price, there are a number of reasons to remain bullish on AMZN shares as we head into 2019.
First is the continued shift toward digital commerce both here in the U.S. and abroad. Each month over the last few years we've seen digital commerce win consumer wallet share per the monthly Retail Sales report. For the all-important holiday shopping season in 2018, MasterCard SpendingPulse reported digital sales growth rose 19% year over year, well ahead of expectations. Let's face it, whether it's for convenience or price comparison shopping, there is no putting the digital Jeannie back in the bottle.
With its Prime service that bundles a number of services including Prime Video, online storage and free two-day shipping, Amazon has been a market share winner in the shift to digital shopping. In recent quarters it has expanded its private label brands into apparel, furniture and other home goods, which sweetens the revenue and margin pot for the company. It's also expanded its apparel related offering with Prime Wardrobe, a service that lets one try on clothes and return them and has an upcoming fashion program coming with Heidi Klum and Tim Gunn, both of whom were previously the stars of "Project Runway."
While most investors correctly focus on Amazon Web Services, its higher margin cloud services business that drives the company's profits and cash flow, the two businesses to watch in 2019 will be its advertising business as well as its online pharmacy acquisition that is PillPack. These -- along with its burgeoning mobile payments service -- Amazon Pay, are likely to be the latest disruptions put forth by Amazon, a company that has excelled at reducing consumer transaction friction. We've seen that with not only its Prime service that has credit cards on file, but also too in its Amazon Go stores and Alexa digital assistants. With Alexa migrating from the home and into the car, including an upcoming integration of Alexa into select Audi vehicles, that service is on the road to being ubiquitous.
There used to be two knocks on Amazon. The first was will it ever make money? With consensus 2018 EPS of $19.64 and prospects for the company doubling that to more than $39 by 2020, we can safely eliminate that as a concern.
The other is the company's international business, which even though it accounts for 28% of revenue, continued to generate operating losses in 2018. Yes, that is a drag on the company's overall bottom line. But as we have seen several times over with Amazon, it invests for the long-term and if we look at the trends in digital shopping outside the U.S., Amazon is playing the long game for this opportunity as it replicates the strategy that has allowed it to succeed in the U.S.
From a stock valuation perspective, some will look at the current PE of 59x on expected 2019 EPS and think the shares are expensive. It's hard to argue with that math but given the speed at which Amazon is growing its EPS, a better valuation tool to employ is a price to earnings growth (PEG) ratio. If we look at the average annual growth rate of Amazon's earnings over the 2015-2020 period, it clocks in at 99%. Applying that to the 59x multiple derives a PEG ratio of 0.6 - a steep discount to the 1.0 that is the minimum for most growth companies. And yes, there are few growth companies that are poised to grow their EPS to the degree Amazon is, but to me that only reflects the number of tailwinds pushing on its business. What's even more amazing is the consensus price target of $2,136, which offers 35% upside from current levels, equals a PEG ratio of 0.8.
For all those reasons, and the fact that I keep seeing United Parcel Service (UPS) , DHL, and Amazon Prime vans all over the place, AMZN shares are once again my pick of the year.
Check out more of Real Money and Real Money Pro's 2019 Picks here:
Stephen Guilfoyle: This Cloud Software Name Is My Top (Long) Stock Pick for 2019
Bret Jensen: My 2 Top Stock Picks for 2019
David Butler: United States Oil ETF Is My Pick for 2019
Ed Ponsi: Merck Is My Top Stock Pick for 2019
Paul Price: Manpower Is My Stock Pick of the Year for 2019
