Two Underperforming Stocks: Amazon and Merck’s Long-Term Potential
Even amid market volatility, investors can uncover valuable stocks. The strategies for investing today remain similar for long-term players: focus on quality stocks that are likely to withstand today’s challenges and thrive over five years or more. If certain stocks are down significantly this year due to market-wide issues or specific company hurdles, it may actually present a better buying opportunity, provided they have the potential to recover. Let’s examine two stocks that have lagged recently but still show promise for long-term growth: Amazon (NASDAQ: AMZN) and Merck (NYSE: MRK).
1. Amazon’s Resilience in a Challenging Economy
President Donald Trump’s trade policies contribute to significant economic uncertainty, impacting Amazon, a leader in e-commerce. This situation could worsen if the economy slips into a recession. Investor sentiment has cooled, particularly following the tech giant’s latest quarterly guidance, which offered weak forecasts despite solid results.
However, there are key aspects to consider from Amazon’s recent quarterly report. Notably, its cloud service, Amazon Web Services (AWS), continues to show strong growth. In the first quarter, Amazon’s net sales were up 9% year-over-year, reaching $155.7 billion, while AWS revenue surged 17% year-over-year to $29.3 billion.
Management sees substantial growth opportunities for AWS, especially with the introduction of artificial intelligence (AI) services. CEO Andy Jassy noted, “Before this generation of AI, we thought AWS had the chance to ultimately be a multi-hundred-billion-dollar revenue run rate business. We now think it could be even larger.”
The strong margins of AWS are expected to positively impact Amazon’s overall profitability. Despite ongoing uncertainties, this growth potential bolsters a promising long-term outlook for Amazon. Additionally, Amazon’s advertising segment presents further opportunities for high-margin growth, benefiting from the platform’s extensive reach.
Moreover, Amazon’s healthcare initiatives, such as Amazon Pharmacy, are disrupting traditional industries. The company excels in identifying and capitalizing on profitable opportunities, alongside a substantial ecosystem of over 200 million Prime members, providing significant monetization potential.
As Amazon navigates near-term volatility, its long-term prospects remain strong. Therefore, investors should consider purchasing shares during any dips.
2. Merck’s Competitive Landscape in Pharmaceuticals
Merck’s challenges began before the current economic climate. The company’s stock has declined due to concerns regarding its leading drug, Keytruda, a cancer treatment that may soon face increased competition, particularly in the non-small cell lung cancer (NSCLC) market.
Summit Therapeutics is developing ivonescimab, a competing treatment that recently showed positive results in China during a phase 3 trial against Keytruda. Yet, ivonescimab has not demonstrated a statistically significant improvement in overall survival in key studies relative to Keytruda.
Keytruda holds a first-mover advantage, being approved for use in the U.S. since 2014. It took eight years to serve its first million patients; management forecasts it could double that number in just two years.
Established drug brands typically find it easier to gain acceptance among physicians and patients. Keytruda has built an impressive reputation, with over 30 approved indications in the U.S.
Even with rising competition, Merck’s Keytruda is positioned well. While its patent exclusivity will end in 2028, the company is developing a subcutaneous version to extend its market presence and fuel growth into the next decade.
Additionally, Merck’s vaccine business, including the HPV vaccines Gardasil and Gardasil 9, remains robust, and newer offerings like Winrevair for pulmonary arterial hypertension will contribute to revenue streams.
Merck’s pipeline boasts numerous programs that could lead to new approvals and label expansions, with further growth anticipated from the company’s animal health segment.
From a dividend perspective, Merck offers a return of 3.9%, significantly higher than the S&P 500’s 1.3%. Over the past decade, it has raised dividends by 80%. Although current performance may be lackluster, Merck could provide substantial returns for long-term investors willing to buy and reinvest dividends.
The opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
