E-commerce Giant and Cloud Computing Powerhouse
Amazon’s stock has been on an epic ascent, outstripping the performance of broad market indices and its “Magnificent Seven” counterparts, marking an incredible 102% surge since the start of 2023. The tech giant’s recent fourth-quarter earnings report further solidified its sterling performance, with investors lauding its remarkable combination of growth and expanding margins.
Domination in E-commerce and Cloud Computing Revival
In the fourth quarter of 2023, every facet of Amazon’s business thrived. North American net sales, including e-commerce, subscriptions, and advertising, ascended by 13% year over year to $105.5 billion. International sales soared even higher, registering a 17% year-over-year growth, achieving a remarkable $40 billion revenue in Q4. Additionally, Amazon Web Services (AWS), the company’s cloud computing division, recorded a 13% revenue surge and is approaching an annual revenue run rate of $100 billion.
Investors were likely pleased with the 13% year-over-year growth from AWS, denoting a significant acceleration from previous quarters, signifying a favorable outlook for the cloud computing sector’s resurgence. This resurgence is attributed to the rise of artificial intelligence (AI), with cloud computing providers like AWS laying the foundation for the computational-intensive generative AI tools that experienced exceptional growth last year.
Crucially, Amazon is not only expanding but also fortifying its profit margins. Over the past 12 months, Amazon’s operating margin has blossomed to 6.4%, marking steady expansion since Q4 2022, when the company posted a modest 2.4% operating profit margin over the last 12 months – a chief reason behind Amazon’s recent stock surge.
Margin Expansion as the Linchpin
Following the rapid infrastructure expansion to support growth during the COVID-19 pandemic, Amazon initiated margin expansion in 2023. There still exists ample opportunity for the tech behemoth to elevate its profit margins to above 10%, or even significantly higher. This is a result of the company’s more lucrative revenue mix, with AWS now constituting 15.6% of net sales and boasting an operating margin nearing 30%. Furthermore, Amazon’s advertising division, which saw its revenue surge by 26% year over year in the last quarter to reach $14.65 billion, presents substantial room for margin expansion due to the inherently high profit margins associated with digital advertising.
Forecast for 2025
If Amazon manages to sustain a 10% annual sales growth in 2024 and 2025, it could reach a revenue of $700 billion in two years. Assuming a 10% profit margin, this equates to $70 billion in annual earnings, nearly doubling its 2023 earnings. This solidifies Amazon’s earning prowess, rivaling tech titan Alphabet. Given the current S&P 500’s average price-to-earnings ratio (P/E) of 27 and applying it to Amazon’s $70 billion in earnings, the company’s stock could command a market cap of $1.89 trillion in 2025 – marginally surpassing its current $1.77 trillion valuation. Furthermore, continued above-average growth and the potential for additional margin expansion post-2025 could prompt investors to assign a premium to Amazon’s stock, potentially resulting in a market cap of around $2.5 trillion at a P/E of 35.
Looking Toward the Future
While the future valuation of Amazon stock is rife with unpredictable variables, a keen understanding of its underlying business fundamentals, impending growth prospects, and burgeoning profit margins can imbue investors with confidence in an even more prosperous trajectory for the tech giant. It seems the best is yet to come for this industry juggernaut.
