In the midst of a fervent AI-driven market surge, Amazon emerges as a towering figure of success. Despite challenging times in early 2023, marked by a significant decline that saw its shares plummet to $84, the company has defied expectations with a remarkable resurgence, soaring over 130%. Wall Street’s unwavering optimism underscores Amazon’s resilience and potential. Here’s why now might be a good time to consider buying Amazon stocks.
Amazon is moving to greater profitability
Amazon’s recent surge to a $2 trillion market cap isn’t just luck—it’s a calculated move towards higher profitability under CEO Andy Jassy. His strategy focuses on beefing up Amazon Web Services (AWS) with AI capabilities while shifting away from lower-margin retail sales.
This shift has paid off big time: Amazon’s operating margins have soared, especially evident in the numbers from Q1 2023 to Q1 2024.
Under Jassy’s leadership, Amazon has revamped its approach, slashing costs and optimizing operations across the board. This includes significant job cuts and a complete overhaul of their fulfillment network. The results speak for themselves: North America’s operating margin skyrocketed from a modest 1.20% to a robust 5.8%, while the International segment turned around from a loss to a solid 2.8% gain.
AWS, the crown jewel of Amazon’s profitability strategy, saw its operating margin climb impressively from 24% to 37%. This boost was partly due to strategic changes in how they manage server depreciation, showcasing Amazon’s knack for turning even technical details into profit drivers.
Amazon’s shift towards higher margins isn’t just a financial maneuver; it’s a testament to their adaptability and foresight in leveraging AI and cutting-edge technologies. As they continue to refine their business model, the prospects for investors looking to capitalize on Amazon’s upward trajectory seem brighter than ever.
Opportunity in AWS’s open source initiatives
In the competitive AI landscape dominated by Microsoft’s Azure and Alphabet’s Google Cloud with proprietary models like BERT and LaMDA, Amazon’s AWS has carved out its own niche.
While AWS may not boast the characteristics of an open-source per se, it has established itself as a great supporter of open-source projects and tools. This flexibility, combined with robust support for scalable infrastructure and a wide array of AI services, sets AWS apart.
Enterprises are increasingly favoring open-source models, which could play to AWS’s strengths. Despite closed-source models often excelling in certain tests and being more cost-effective, the adaptability of open-source models makes them preferable for meeting specific enterprise needs.
This potential shift holds significant implications for AWS’s market position in cloud computing. As companies lean towards open-source AI applications, AWS stands to benefit, potentially reducing the incentive for its customers to migrate to Azure or Google Cloud.
AWS’s leadership position is further bolstered by its extensive enterprise data repository. This aligns with CEO Andy Jassy’s philosophy that customers prefer bringing models to their data rather than the reverse, contrasting with the strategies of Azure and Google Cloud.
In essence, AWS’s commitment to supporting open-source initiatives positions it strategically amidst the evolving AI landscape. As enterprises increasingly embrace open-source models, AWS appears well-positioned to capitalize on this trend and maintain its competitive edge in cloud computing.
Amazon’s valuation in lights of trends
When it comes to evaluating Amazon’s stock, it’s clear the numbers tell an interesting story. Currently, Amazon’s forward P/E ratio stands at around 43x, which might seem steep compared to its cloud rivals like Microsoft and Alphabet, trading at 38x and 24x respectively.
However, focusing solely on P/E ratios can be misleading. What really matters is the future growth potential. Amazon is projected to achieve an impressive forward EPS long-term growth rate of 23.4% over the next three to five years. This far outstrips Microsoft’s 13.7% and Alphabet’s 17.6%, showcasing Amazon’s robust growth trajectory.
To get a more accurate picture, we can look at the forward PEG ratio (P/E ratio divided by the EPS growth rate). Amazon’s forward PEG ratio of 1.87 appears quite attractive when compared to Microsoft’s 2.78, although it falls slightly short of Alphabet’s 1.39.
In essence, while Amazon may appear pricier based on traditional P/E metrics, its strong growth prospects make its valuation more compelling when considering the forward PEG ratio. This suggests that Amazon’s stock could be positioned for sustained growth, potentially outpacing its competitors in the cloud computing space.
Should you buy Amazon stocks?
Here’s an extra reason to feel optimistic about Amazon: Every single analyst on Wall Street is singing the same tune—“Buy.” That’s right, not a single one is recommending anything less.
With 42 bullish analysts backing it, the average price target for Amazon’s stock stands at $221.70 per share. This implies a promising upside potential of about 14.72%.
No one knows what will happen to Amazon stocks. Nevertheless, analysts’ expectations show a promising future.
(Information in this post is for general informational purposes only. It cannot and should not be considered as suggestions or recommendations regarding investing or financial decisions.)
