Does Amazon Deserve More Credit?

Discussion in 'Trading news and analysis (syndicated content)' started by StreetAuthority, Jan 24, 2017.

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  1. StreetAuthority

    StreetAuthority Active Member Official Contributor

    Membership now has its privileges at Amazon (Nasdaq: AMZN). The e-commerce giant recently announced its new Amazon Prime Rewards Visa Signature credit card, giving Prime shoppers more ways to buy and earn cash back in the process. Meanwhile, critics who continue to bet against AMZN stock -- citing outdated valuation arguments -- must prepare for more losses while the longs ride these shares higher.

    Too Good To Be True Or Too Good To Pass Up?
    The new Amazon Prime Rewards Visa card, in partnership with JPMorgan Chase (NYSE: JPM), gives Prime shoppers a whopping 5% cash back on all Amazon purchases. The card also rewards members with 2% cash back at restaurants, gas stations, and drugstores and 1% back on all other purchases. There is no cap on the amount of rewards cardholders can earn. The card has no annual fee and does not charge foreign transaction fees, and charges 14.74% to 22.74% annual percentage rate (APR) on unpaid balances versus the average credit card interest rate of 16.35%.

    Still undecided? According to Zach Honig, editor in chief of rewards site The Points Guy, Amazon's new card is a good choice for someone looking for "a very simple option for getting the greatest return on Amazon purchases." Honig said, "If you want something really straightforward, one card to use for all Amazon purchases, this is the way to go."

    To reap these benefits, all Amazon wants you to do is become a Prime member, which itself costs $99 per year to join. And here's the thing: When new cardholders sign up, they will receive a $70 Amazon gift card. In other words, the net cost to be a Prime Member is only $29. The announcement pushed AMZN stock above $800 per share for the first time since October. But this is only the beginning. Here's why the shares will go higher.

    Amazon Is Betting On Itself
    Right away, the first thought that comes to mind is why would Amazon do this? To give 5% cash back, which is 3 percentage points above the previous card's rate, means a narrower profit margin for the company. And lack of profits has been a popular criticism of Amazon. From my vantage point, however, it seems that Amazon is betting on itself. The company sees this card as another way to lock shoppers into its ecosystem. At the same time, the announcement of the new card should send chills down the spine of the brick-and-mortar competition.

    Why? At a time when the likes of Macy's (NYSE: M) and J. C. Penney (NYSE: JCP) are scaling back stores and cutting their workforce, Amazon is implying it has so much business and room for expansion that it can afford this type of expense. Amazon seems even more intent than ever to boost capital expenses to achieve its main objective: to disrupt every type of retail. And with the new card reportedly to be made out of metal, Amazon wants to take on the persona of, say, American Express (NYSE: AXP) and provide the prestige that comes with membership.

    A Win-Win Situation
    Last week, Amazon announced it would create 100,000 jobs by the middle of next year. Bezos touted the addition of new jobs across multiple areas of the company's operations – from fulfillment centers to logistics to machine learning and cloud services. Of course, the mainstream immediately called the job creation plan an attempt by Bezos, who owns the Washington Post, to win political favor with then-President-elect Donald Trump. I won't presume to know Bezos' motivation, but he didn't become the world's third-richest person without focusing on the bottom line.

    Even if "getting in the president's good graces" was considered, the fact that Amazon wants to add 100,000 jobs suggests Amazon has the growth capacity and the demand to do so. The company is still focusing on faster deliveries. To that end, the company's Prime Air fleet, its freight liners and a host of other logistical investments will need to be staffed. Amazon will also need to make further hires as it seeks to grow its Prime members. And Bezos realizes if he's able to achieve these goals, while helping the leader of the free world meet a campaign promise, well… that's just good business.

    The Bottom Line For AMZN Stock
    Betting against Amazon CEO Jeff Bezos has proved painful for the past five years. AMZN stock has gained 360% during that span. Bezos, who arguably now deserves the same genius tag as Steve Jobs, continues to push all of the right buttons. Bezos is pushing others to respond. As such, AMZN stock will respond too. With shares trading at around $806 and growth tailwinds at its back, AMZN stock is a sure bet to reach $1,000 in the next 12 to 18 months.

    Risks To Consider: Despite the strong revenue growth, Amazon's profit margins -- and the extent to which Bezos can increase and lower spending -- is a closely watched metric that moves the stock price. Increased investments on emerging technologies, such as drone delivery, may pressure profits.

    Action To Take: Amazon is a near monopoly in e-commerce that is lead by an innovative CEO who understands what drives consumers and how to get it to them. Position long on shares of AMZN now.

    Editor's Note: StreetAuthority's experts have pinpointed over two dozen game-changing tech stocks in the last few years -- but this year's "Virtual Reality Revolution" is set to break all our past records... But first you have to know how to play it...

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