Amazon: A Great Holiday Buy

E-commerce giant Amazon had an incredible run over the last few months. The company's stock price sits nicely at 52-week highs, driven by numerous secular drivers. Even though Amazon is a pricey stock under traditional valuation metrics, it still has strong upside due to its blockbuster holiday quarter.

Fantastic holiday season
According to MasterCard SpendingPulse, retail sales this holiday season were up roughly 3.5%. However, online sales are estimated to grow up to 15% year-over-year, according to the National Retail Federation, or NRF.

Online sales are projected to be almost 14% of total holiday purchases, even though overall e-commerce sales comprise roughly 6% of annual retail sales in the United States.

Amazon, being the top dog of the e-commerce segment, had the best day in its history on the peak shopping day. On Cyber Monday alone, 36.8 million items were ordered worldwide and millions of Kindle tablets and readers were sold in this quarter. Amazon has a fantastic position in mobile e-commerce, with more than half of its customers ordering items on mobile devices. Amazon also disclosed that it shipped to 185 countries this holiday season.

Amazon's same-store sales in the third week of December stood at 38.9%, which was much higher than online marketplace giant eBay which stood at 18.1%, according to data from ChannelAdvisor.

ChannelAdvisor cited that eBay's shopping growth was slower compared to Amazon because very few eBay sellers offer two-day shipping at decent prices. However, Amazon offers millions of products with a two-day shipping schedule for its Prime members.

Strong financials
Last quarter, Amazon's top line revenue grew 24% year-over-year to $17.1 billion and gross margins stood at 27.7%. The company swung to an operating loss of $25 million in the last quarter. Amazon's investment phase is ongoing and the impact of this cycle has held operating margins for the last twelve months at a paltry 0.91%.

However, the company is ramping up its selection for customers by constantly adding to its digital media collection. Amazon now offers more than 27 million movies, TV shows, books, apps, songs, magazines, and games. Last quarter, media revenue increased 9% year-over-year to $5.03 billion.

Electronics, general, and merchandise revenue went up 29% to $11.1 billion. Amazon's revenue from other avenues, including higher-margins businesses like Amazon Web Services and display advertising, are growing at a rapid rate. Revenue growth in the last quarter was a stellar 56% year-over-year at $1.01 billion.

Blockbuster quarter ahead
Amazon's total customer accounts surged to 224 million last quarter, and it will almost certainly continue to climb even higher. In 3Q13, the company's worldwide paid unit growth stood at 29%, and seller units represented 40% of total unit sales.

Amazon's revenue growth in the electronics and general merchandise category in North America grew 33% last quarter, which contributed to acceleration in revenue growth for the fourth consecutive quarter. Also driven by content and e-book sales, Amazon's media business in North America grew 18%, which was a reacceleration of media revenue growth for the third consecutive quarter.

Amazon already dropped a lot of hints at a blockbuster holiday quarter. It launched a number of Kindle devices before the start of the holiday season, including a third-generation Kindle Fire and a newer version of the popular Kindle Paperwhite. Amazon recently disclosed that it now has tens of millions of Prime subscribers, and the week before Christmas the company added one million more Prime subscribers.

Amazon Prime is growing rapidly
The company benefits immensely from Prime subscriptions because this revenue-generating component is stable and aids gross margins. Having more than 20 million customers is significant because Amazon can invest heavily in adding video content and, in turn, rope in more consumers. As the Internet TV space is growing rapidly, Amazon is licensing more video content from studios and content owners.

The company's video library surged to more than 41,000 titles, as it competes with Netflix and Hulu. However, Netflix is still well ahead of Amazon, and also provides a much better user experience. Netflix's global customer count surged to more than 40 million users, and its content library is estimated to be more than 60,000 titles.

Most importantly, Prime customers shop a lot more on Amazon's gigantic platform because of the free two-day shipping benefit. The spurt in Amazon Prime sign-ups might have been caused by Amazon's increase of its Super Saver shopping minimum. The company retained the $25 minimum shipping rate for 10 years, and recently increased it to $35. This price increase has likely encouraged millions of consumers to check out Amazon Prime.

Going forward
For the current quarter, Amazon's management expects to be in the range of $23.5 billion-$26.5 billion. The operating income guidance was very wide, as management projected an operating income range for Q4 of negative $500 million to positive $500 million.

Amazon remains focused on enhancing its customer experience by providing better prices, more selection, and convenience. Amazon has years of double-digit top-line revenue growth ahead. The company is still very small in major emerging markets like China, India, and Brazil, but it has substantial room for growth in these key markets.

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The article Amazon: A Great Holiday Buy originally appeared on Fool.com.

Ishfaque Faruk owns shares of Netflix. The Motley Fool recommends Amazon.com, eBay, and Netflix. The Motley Fool owns shares of Amazon.com, eBay, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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