Should you consider buying Amazon stock as e-commerce giant grows pharmacy ventures?

Amazon.com (AMZN:US) has kicked off 2024 with a strong start, marked by a recent earnings report that propelled its stock to new heights.

However, the tech giant must continue to enhance the profitability of its extensive online retail operations to sustain the momentum of Amazon stock, all while defending its position against competitors in the cloud-computing sector.

With a market capitalization exceeding $1.8 trillion, Amazon stands as one of the world's most valuable companies. The Seattle-based behemoth is approaching a record high share value last seen in 2021 but is encountering increased competition in digital sales from rivals like Walmart (WMT:US) and Target (TGT:US).

Amazon maintains its dominance in e-commerce and cloud computing through Amazon Web Services. The company has leveraged generative artificial intelligence and a thriving advertising business to drive its growth.

Amazon maintains its dominance in e-commerce and cloud computing through Amazon Web Services. The company has leveraged generative artificial intelligence and a thriving advertising business to drive its growth.

Nevertheless, Amazon's stock is currently trading well above its last significant buy point. Additionally, the company faces a substantial antitrust challenge from the U.S. government as it navigates its role as the "Everything Store" operator.

So, the million-dollar question – is Amazon still a buy?

Pharmacy Efforts

Amazon recently revealed its plans to broaden its pharmacy initiatives. On March 26, the company announced its intention to introduce same-day delivery services for prescription medications in New York City and the wider Los Angeles region. The e-commerce titan aims to extend this service to over a dozen cities by the year's end.

According to the announcement, Amazon will utilize compact facilities equipped with commonly prescribed medications to facilitate its same-day delivery operations. This expansion follows Amazon's earlier provision of same-day prescription delivery in Austin, Indianapolis, Miami, Phoenix, and Seattle.

Earlier this month, Eli Lilly (LLY) announced a partnership with Amazon to distribute its highly sought-after weight-loss drug Zepbound through a service called LillyDirect.

Amazon entered the pharmacy market in 2020, following its acquisition of the online pharmacy business PillPack two years prior. The company does not provide separate financial results for its healthcare initiatives in its reports. During the company's analyst call in February, Chief Executive Andy Jassy expressed enthusiasm about the progress of the Amazon Pharmacy business, stating that he "really like(s) the momentum that we're seeing."

However, Amazon recognizes that the majority of pharmacy orders are still fulfilled in-person. In its recent press release, the company referenced a McKinsey & Co. research report indicating that as of 2021, less than 10% of pharmacy orders in the U.S. were delivered.

Pharmacy services are a component of Amazon's broader healthcare strategy, which Jassy has emphasized since assuming the role of chief executive in 2021. In 2022, Amazon made a significant move by acquiring One Medical, a primary care services provider, for $3.9 billion.

AWS Growth

Amazon's recent earnings report also alleviated some worries surrounding its profit-driving cloud-computing sector.

The 13% year-over-year sales growth for Amazon Web Services showed an improvement from the division's 12% growth rate in the third quarter. Analysts had been searching for signs indicating that AWS could regain momentum in sales following a slowdown in growth last year.

AWS maintains its position as the leading cloud provider in terms of market share, offering cloud computing capabilities and storage to countless businesses. It also contributed two-thirds of Amazon's $37 billion in operating income for 2023.

AWS maintains its position as the leading cloud provider in terms of market share, offering cloud computing capabilities and storage to countless businesses. It also contributed two-thirds of Amazon's $37 billion in operating income for 2023.

However, investors have been monitoring the business with a degree of concern since early last year. One reason is the deceleration in revenue growth as companies scaled back on certain computing expenses.

Additionally, there are apprehensions that Amazon may not be as well-positioned as Microsoft (MSFT:US) to secure business in generative AI.

Leading up to Amazon's fourth-quarter earnings release, Piper Sandler analyst Thomas Champion mentioned in a client note that 70% of the questions he received from investors were related to AWS.

Following the report, Champion informed clients that AWS' growth for the fourth quarter "hit the bullseye."

Competition from Target, Walmart

Amazon maintains a commanding lead in U.S. online retail sales, significantly ahead of its competitors. However, it faces increasing challenges from brick-and-mortar giants and emerging players such as TikTok and Temu from China.

One example is Target, which recently unveiled its paid membership program, Target Circle 360. Priced at $99 annually, the subscription offers free same-day shipping for orders of $35 or more through Target's Shipt service, along with free two-day shipping for other orders. The membership is set to launch on April 7 with a promotional price of $49 annually until May 18.

This move positions Target to compete with Amazon's $139 annual Prime subscription and Walmart's $98 per year Walmart+. Walmart has also announced an expansion of its on-demand delivery service, beginning at 6 a.m., with the promise of express delivery within an hour.

Nevertheless, Amazon's dominance in the U.S. e-commerce landscape remains robust.

According to analysts at Bank of America, Amazon, Walmart, Target, and eBay (EBAY) make up what they call the 'Big 4' of e-commerce. In a recent report, BofA analysts predicted Amazon's share of U.S. e-commerce sales to rise to 38.7%, up from 37.7% in 2024. Walmart's market share is expected to increase to 8.8% from 8.3%, while eBay's share is projected to dip slightly to 2.9%, and Target's to remain stable at 1.7%.

The analysts also estimated that the gross merchandise value (total value of online sales) for the Big 4 increased by 15% year-over-year in the fourth quarter of 2023. Walmart experienced the strongest growth at 17%, followed by Amazon at 14%. Target and eBay showed relatively flat growth compared to the previous year.

Summary

Despite facing competition from brick-and-mortar giants like Target and Walmart, Amazon's continued expansion into the pharmacy sector, the growth of its Amazon Web Services division, and its leading position in U.S. online retail sales suggest a positive outlook for investors. With these developments, investors appear optimistic about Amazon's potential for growth and success in the market.

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