Amazon | Fundamental Analysis | Detailed Analysis | Must Read...

In case you haven't been paying attention to Amazon over the past half-decade, it has been building a huge logistics network across the United States. And even though the online retailer's sales have slowed in the last couple of quarters, capital spending growth remains strong.

According to the company's quarterly report filed with the U.S. Securities and Exchange Commission, most of the spending is for "additional capacity to support our fulfillment operations." It means that Amazon expects to see even more growth in its online retail business.

In addition, Amazon stock has risen rapidly in recent weeks. The stock is up more than 10 percent since the beginning of October. That compares with an 8.5% rise in the S&P 500 over the same period. Given that the stock has surpassed $3570 for the first time since July, is it still attractive at that level? Or is now a good time for investors to lock in profits?

A closer look at Amazon stock makes it clear that selling the stock at this level could be a mistake. Moreover, the valuation of the stock relative to the company's long-term prospects suggests that at this level, the stock could be an attractive buy.

Amazon is showing strong momentum in several important metrics, including e-commerce sales, cloud computing revenue, and more. The broad-based momentum suggests that the company's e-commerce and cloud computing business will continue to grow rapidly at both the top and bottom line over the long term.

Amazon's revenues for the nine months ended Sept. 30, 2021, were $332.4 billion, up nearly 28% year over year. That figure helps shrug off some of the unwieldinesses of the company's interesting comparisons, as the company benefited this year from increased demand for e-commerce in the wake of the COVID-19 pandemic. But it wasn't just e-commerce that drove that growth. It was also fueled by a 36 percent jump in Amazon Web Services (AWS) cloud computing revenue and a 70 percent increase in the company's "other" revenue for the year, which mostly consisted of Amazon's fast-growing advertising business.

But what about Amazon's exorbitantly high price-to-earnings ratio of 70? If you look at how the company's profits are growing faster than revenues, thanks to the operating leverage inherent in Amazon's business model, it is clear that this is a pretty low ratio in the context of Amazon's earnings outlook.

For example, in nine months in which Amazon's revenues grew 28% year-over-year, its net income grew 35% - and this even though the largest U.S. employer imposed billions in COVID-19 security costs. Not to mention that labor and supply shortages during this period worried Amazon and its shareholders as much as many other retailers. Given the operating leverage that Amazon gets as sales grow, the company's Q4 operating margin was 6.2%. That's up from 5.7% a year ago and 5.4% two years ago.

Among other things, it should be noted that Amazon is actively investing in all aspects of its logistics network. The company now operates an air hub out of Cincinnati. By the end of the year, the company will have 85 planes that will transport goods across the country daily. The number of ports in the network has increased by 50 percent this year, and sea container handling capacity has doubled.

The e-tailer now has more than 800 delivery points across the U.S., which are responsible for preparing parcels for last-mile delivery. According to logistics consultant MWPVL, there were only 337 at the end of 2020. Not to mention the ever-expanding area of warehouses and sorting centers. CFO Brian Olsavsky said the company is on track to increase its total fulfillment network area by more than 50 percent in 2020. In other words, Amazon will more than double its footprint from 2019.

Despite Amazon's significant increase in investment in its logistics network, investors will be disappointed if they think that this investment will lead to an immediate increase in the online retailer's sales.

Amazon faces a labor shortage shortly. The company is hiring 150,000 seasonal workers this year, and it recently introduced wage increases for both new and existing employees. Labor shortages are Amazon's biggest constraint right now, Olsavsky told analysts during the company's third-quarter earnings call.

Looking ahead, analysts are justifiably expecting huge growth in Amazon's revenues. According to the current consensus analyst forecast, Amazon's earnings per share will grow 36 percent a year over the next five years.

The combination of Amazon's expectation of rapid earnings growth over the long term due to the company's operating advantage with Amazon's broad business momentum in its core segments suggests that the stock is very attractive at this level.