Amazon (NASDAQ: AMZN) broke into the Dow Jones Industrial Average in a bold move last February, injecting the typically conservative, income-focused index with a dose of high-octane growth potential.
Since its meteoric rise in 2023, Amazon stands tall as the top-performing stock in the Dow as of June 27, 2024.
With Amazon surging to new heights, what fuels its ascent, and is it wise to consider buying around its peak?
Image source: Getty Images.
The Power of Amazon’s Cash Flow
Before its rebranding to Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), Google derived its name from its flagship search engine. But Alphabet’s crown jewel today is arguably YouTube. Facebook, now Meta Platforms (NASDAQ: META), went through a similar transformation, with Instagram now surpassing its parent’s value. Similarly, while Amazon bears the name of its original retail operation, the true gold lies within Amazon Web Services (AWS).
Leading the charge in cloud infrastructure, AWS boasts a 50.1% market share among top 10 providers, with a remarkable 31% year-over-year customer growth according to HG Insights 2023 Infrastructure as a Service Market Report. Notably, 86% of AWS customers spend under $1,000 monthly on its services. This prowess is reshaping Amazon’s financial landscape, evident in its latest trailing-12-month (TTM) results compared to the past half-decade.
Metric | Q1 2020 TTM | Q1 2021 TTM | Q1 2022 TTM | Q1 2023 TTM | Q1 2024 TTM |
|---|---|---|---|---|---|
North America revenue | $181.09 billion | $254.52 billion | $284.71 billion | $323.52 billion | $362.29 billion |
North America operating income | $6.06 billion | $10.79 billion | $2.25 billion | ($381 million) | $18.96 billion |
International revenue | $77.64 billion | $115.96 billion | $125.9 billion | $118.37 billion | $134.01 billion |
International operating income | ($2 billion) | $2.37 billion | ($3.46 billion) | ($7.71 billion) | $903 million |
AWS revenue | $37.55 billion | $48.65 billion | $67.14 billion | $83 billion | $94.44 billion |
AWS operating income | $10.05 billion | $14.62 billion | $20.89 billion | $21.45 billion | $28.93 billion |
Data source: Amazon.
Amidst the disparity in operating income from Amazon’s North American and international fronts, and sluggish top-line growth, AWS emerges as the juggernaut. Its operating income has nearly tripled in just five years, outpacing revenue growth. This hints at superior margins — a stark contrast to previous concerns of margin erosion amidst fierce competition. This transformation likely underpins Amazon’s dominant stock performance.
An Exceptional Business Model
Amazon’s penchant for pouring back profits into its operations makes traditional metrics like price-to-earnings ratio unsuitable. Historically, Amazon leaned on its price-to-sales ratio, comparing a company’s value to its revenue. Notably, a glance at Amazon’s P/S ratio in the chart below suggests the stock commands a premium compared to its past, indicating an expensive valuation.
Assessing Amazon’s Financial Health
Amazon’s Evolution in the Financial Landscape
Amazon’s financial outlook has undergone a significant transformation in recent years, primarily due to the rapid growth of Amazon Web Services (AWS). The traditional P/S ratio, while a standard metric for assessing businesses over time, may not capture the essence of Amazon’s current state accurately. As AWS expands its footprint and Amazon’s operating income and margins soar, evaluating Amazon purely based on its P/S ratio would overlook critical nuances.
Visualizing Amazon’s Success Through Operating Metrics
Amazon’s triumph is vividly displayed in its trailing twelve months (TTM) operating income, which hovers near the impressive $100 billion mark. Bolstered by the success of AWS and a resurgence in its North America and international divisions, Amazon’s operating margin has reached a decade-long pinnacle. This chart serves as a testament to Amazon’s resilience and adaptability in a dynamic market environment.
Investing in Amazon, with its 3.53 P/S ratio, raises intriguing questions about valuing a high-growth, low-margin business. However, when considering Amazon’s trajectory in expanding margins and top-line growth, the narrative becomes more compelling.
Amazon: Striking a Balance Between Valuation and Profits
Amazon’s appeal as a robust investment option is underscored by its proximity to historical P/S ratios. The company’s enhanced business quality and a promising trajectory towards consistent profitability position it favorably in the market. Analyst estimates projecting significant earnings per share growth for 2024 and 2025, translating into a reasonable price-to-earnings ratio, further bolster Amazon’s investment case amid a backdrop of a 130% stock price surge within 18 months.
While Amazon’s stock chart reflects its current dominance, considerations about valuation and sustainable margin expansion shape the investment landscape for prospective investors. The company’s journey from adversity to acclaim showcases its resilience and adaptive capacity in a competitive market setting.
Navigating Amazon’s Investment Potential
Assessing Amazon as a potential investment requires a nuanced approach. Despite its lofty valuation, Amazon’s robust trajectory towards compounding earnings presents an enticing proposition for patient investors willing to ride the waves of market fluctuations. Understanding the delicate balance between growth and valuation becomes essential in maximizing the investment potential in Amazon.
Investing Wisdoms and the Marketplace
The evolving nature of Amazon’s financial landscape invites discussions on market dynamics and investment strategies. As investors weigh the pros and cons of investing in Amazon, historical insights and future projections offer valuable lessons for navigating the ever-changing investment landscape.
Should you invest $1,000 in Amazon right now?
Before considering an investment in Amazon, prudent investors should carefully deliberate on the evolving financial landscape and market dynamics. Understanding the intricacies of Amazon’s valuation and growth potential is paramount in making informed investment decisions.
