As Amazon invested millions of dollars on its expansion plans, its earnings took a major hit during the second quarter. With the company currently focusing on grabbing market share, operating losses aren’t a big worry. Its top priority is to boost its revenues through low-priced products throughout the globe. Thus far, Amazon has been extremely successful with its long-term plan. A 22% rise in its revenue is a testimony to this success.
Competitors
Amazon’s biggest competitor, eBay Inc (NASDAQ:EBAY), released its second-quarter results during the third week of July. The company reported a profit of $0.49 a share, down $0.04 from the same quarter last year. Its revenue jumped by 4%, however. eBay Inc (NASDAQ:EBAY)’s marketplace posted an increase of 10% in revenue, while its payment segment’s revenue grew by 20%. The main reason behind low profit was a 12% increase in the company’s operating expenses.
eBay Inc (NASDAQ:EBAY) is trading at a forward price-to-earnings ratio of 16.14, making it one of the cheapest buys in the retail industry. According to the sell side, eBay Inc (NASDAQ:EBAY) has a mean target price of $63 which shows that it’s undervalued by more than 20%. Its low price makes it one of the best buys in the retail sector.
Another competitor, the American warehouse club Costco Wholesale Corporation (NASDAQ:COST) , reported an increase of 8% in its June sales. Changes in oil prices had a positive impact on Costco Wholesale Corporation (NASDAQ:COST)’s same-store sales, while currency fluctuations negatively impacted the company. In 2013 and onwards, Costco Wholesale Corporation (NASDAQ:COST) has plans to expand across the globe, particularly in the Asian-Pacific region.
Though Costco Wholesale Corporation (NASDAQ:COST) is doing well, its current stock price doesn’t make it a lucrative investment. Costco Wholesale Corporation (NASDAQ:COST) is trading at a high forward price-to-earnings ratio of 23.26, making it one of the most expensive buys in the retail sector. According to the sell side, it has a mean target price of $114 which makes it slightly overvalued. I don’t recommend buying Costco Wholesale Corporation (NASDAQ:COST) at this stage.
Conclusion
As Amazon’s long-term strategy is to sell digital content through its gadgets, it wants to sell as many Kindle devices as possible — even at a loss. Selling more digital content in the future will generate healthy margins for the company and turn its losses into profits. It has been extremely successful in implementing this plan in the U.S. but still needs time to expand in Asia. In Europe, the Kindle looks strong but sluggish economic conditions have slowed its growth. In the long term, however, Amazon shouldn’t worry about the European market. Further, Amazon Web Services’ tremendous growth reflects that the company is on track to achieve its long-term goals.
The amazing thing about Amazon is the investors who just keep on having faith in it. A high forward price-to-earnings ratio of 98 shows that investors expect Amazon to generate substantial profits in the future. They seem to be thinking in the right way, as it is all set to achieve substantial incomes in the future. In short, buy Amazon before it’s too late.
Waqar Saif has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Costco Wholesale, and eBay. The Motley Fool owns shares of Amazon.com, Costco Wholesale, and eBay. Waqar is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article This Retailer Is Heading the Right Way originally appeared on Fool.com is written by Waqar Saif.
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