By Amazon.com Inc (NASDAQ: AMZN) is increasingly becoming the go-to store for everyday items like dish soap and paper towels, thanks to the convenience of same-day or next-day delivery.
As more consumers turn to Amazon for household essentials, this shift might seem like a win for the company—but investors may not be as enthusiastic, at least in the short term.
While the ease of shopping from home and receiving guaranteed delivery within 24 hours is appealing to consumers, it’s not as promising for Amazon’s bottom line shortly.
The reason? Fulfilling orders for low-priced goods, such as household essentials, puts pressure on the company’s profitability, which could weigh on its stock price.
Amazon’s stock is already down roughly 8% from its year-to-date high in early July, reflecting these concerns.
Short-term profitability challenges for Amazon
In its second-quarter earnings report in August, Amazon announced revenues of $147.98 billion, slightly below the $148.56 billion expected by analysts.
Part of this shortfall may be due to the company’s increased focus on expanding its offerings of low-priced, everyday items.
While this strategy drives growth in customer acquisition and sales volume, it also comes with tighter profit margins.
However, Amazon has a long history of sacrificing short-term profits in pursuit of long-term growth.
The company is known for its ability to shift its focus back to profitability once it has established a dominant position in new markets.
Jeff Marks, Director of Portfolio Analysis at the CNBC Investing Club, believes this strategy will pay off in the long run.
“If people buy everyday essentials on Amazon, they’re more likely to buy higher-margin products too. It may hurt margins now, but Amazon will likely find a way to fix that in the future,” says Marks.
In other words, Amazon’s current focus on capturing wallet share could eventually translate into long-term gains for the stock.
Amazon stock could reach $210
Despite the near-term profitability concerns in its retail business, Amazon still holds substantial upside potential.
According to Needham analyst Laura Martin, investors are largely discounting Amazon’s eCommerce segment, pricing the company more as a services provider than a retail giant.
Martin has a “buy” rating on the stock, with a price target of $210, which suggests a potential gain of nearly 15% from its current levels.
Martin is also bullish on Amazon’s future, thanks to its potential to capitalize on the artificial intelligence (AI) boom.
As AI becomes an increasingly important part of Amazon’s services business, it could serve as a major growth driver, while eCommerce remains a valuable bonus.
“Amazon’s AI capabilities will act as a tailwind, making its shares a strong investment,” she noted in a recent research report.
Market analyst Ritesh A. echoes this sentiment, emphasizing Amazon’s solid long-term prospects. “Amazon’s long-term and super-long-term outlook remains strong,” he wrote in a recent report.
Amazon’s expansion into everyday essentials may be a challenge for profitability in the short term, but its long-term strategy of customer acquisition and growth remains solid.
With a history of navigating through short-term hurdles, the company is well-positioned to shift back to profitability and benefit from other growth avenues like AI.
Investors with a long-term perspective may find Amazon stock, with its potential to reach $210, a worthwhile investment even in today’s uncertain market conditions.
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