Recently, I haven’t bought many stocks for my portfolio. There are two reasons for this. Firstly, I’m pretty comfortable with both my overall asset allocation and my stock portfolio. Secondly, I suspect we may see some better buying opportunities in the months ahead.
Having said that, I did buy one stock last month. That was Amazon (NASDAQ: AMZN). During the month, I added to my position to make the stock a top-five holding in my portfolio. Here’s a look at why I boosted my holding.
Why I bought more Amazon stock
I’m bullish on Amazon stock right now for a number of reasons. Firstly, I expect the company’s e-commerce sales to grow significantly in the years ahead. In the short term, Amazon could benefit from the high levels of savings consumers have built up over the last 18 months. A lot of savings are likely to be spent on discretionary items – which Amazon sells plenty of.
In the long run, the company should benefit from the structural shift to online shopping. Experts believe that between now and 2028, the e-commerce market will grow at around 10% per year. This growth should provide strong tailwinds for Amazon.
Secondly, I expect Amazon to see substantial growth in its cloud computing division in the years ahead. Cloud computing underpins nearly all of the technology we use today. Sending an email, streaming a TV show, posting photos on social media… all of these activities are made possible by cloud technology. Looking ahead, the cloud is set to play a key role in the growth of new technologies, such as artificial intelligence, robotics, and autonomous vehicles.
Amazon is the leader in cloud computing. Its cloud division, Amazon Web Services (AWS), provides on-demand cloud computing services to companies and governments on a metered pay-as-you-go basis. In the first quarter of 2021, revenue from the cloud division came in at $13.5bn, up 32% year-on-year. I can see revenue rising significantly from here as technology continues to advance.
Share price upside
Third, I really like Amazon’s share price setup. Last year, its shares had a great run. This year however, the share price has been consolidating. That’s very healthy, in my view. The stock has now built a solid base from which it can move higher over time. It’s worth noting that since the company’s Q1 results, many analysts have lifted their price targets for Amazon stock to $4,000 or higher.
Finally, I see the valuation as quite reasonable. Currently, Amazon shares sport a forward-looking P/E ratio of just over 60. That is quite high by UK standards. However, for Amazon, it’s actually quite low. In the past, AMZN has traded at much higher valuations.
Of course, there are risks to consider here. One is the threat of competition. Amazon operates in highly competitive industries. For example, in cloud computing, Microsoft and Alphabet are trying to capture market share.
Another is regulatory scrutiny. Recently, the company has been investigated by a UK regulator over fake reviews. Plenty of other regulators are looking at the group. Amazon has also historically been a volatile stock. Pullbacks of 20%+ are very normal.
Overall however, I see the risk/reward proposition here as attractive. I’m excited about the company’s growth potential and I see the stock as a core holding.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns shares of Alphabet (C shares), Amazon, and Microsoft. The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Alphabet (C shares), Amazon, and Microsoft. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.