In the unfolding year of 2023, the economy’s performance has pleasantly surprised many, propelling technology stocks, including Amazon (NASDAQ:AMZN), to remarkable heights. Aiding this ascent are both the rapid strides of Generative AI (Artificial Intelligence) and the cost-reduction initiatives undertaken by tech giants, which have synergistically bolstered stock prices.
Benefitting from this favorable landscape, Amazon stock is on an upward trajectory. The shares of this omnichannel retail and cloud services provider have soared by over 66% year-to-date, significantly outpacing the S&P 500 Index ($SPX).
Notably, this impressive performance includes a surge of more than 10% in AMZN’s value following its remarkable second-quarter earnings announcement last week. Of particular note, the company reported earnings of $0.65 per share in Q2, decisively surpassing Wall Street’s expectations of $0.34.
While Amazon’s stock price has experienced substantial appreciation, the company stands as a potential long-term winner. Furthermore, several factors, such as business reacceleration, AI opportunities, and an emphasis on enhancing profitability, bolster the optimistic outlook.
In this context, let’s delve into the factors that position Amazon’s stock as an attractive investment at its current levels.
AWS: A Catalyst for Growth
A central growth catalyst for Amazon is its cloud computing platform, Amazon Web Services (AWS), which significantly contributes to its profitability. The segment’s performance faced headwinds from macroeconomic factors in previous quarters, impacting enterprise spending and subsequently its performance.
Nevertheless, AWS retains its leadership in the cloud infrastructure sector, with its revenue growth stabilizing during the second quarter as customers reverted to deploying new workloads. Furthermore, the ongoing digital transformation and an improved macroeconomic environment are expected to reinvigorate the segment’s growth.
Additionally, with its comprehensive suite of storage, analytics, database, and data management services, AWS is positioned to be a long-term partner for customers in Generative AI. Amazon is heavily investing in this area to drive future growth opportunities.
Advancements in Advertising
Despite challenging macroeconomic conditions, Amazon’s advertising revenue has continued to gain momentum. Notably, the division’s revenues surged to $10.7 billion in the second quarter, up from the previous year’s $8.8 billion.
The expansion of this segment is largely driven by its performance-based advertising offerings. Amazon is harnessing machine learning to assist advertisers in targeting highly relevant audiences with optimal cost efficiency. Furthermore, through a partnership with Pinterest (PINS), the company is displaying ads on its website, directing customers to discover and purchase relevant products on Amazon, thereby adding value to brands and advertisers.
With a growth rate exceeding 20% in each of the last six quarters, the advertising segment is making impressive strides and emerging as a robust growth driver for the company.
Cost Reductions and Bottom-Line Boost
The upward trajectory of high-margin segments (AWS and advertising) is expected to positively impact Amazon’s bottom line. Additionally, the company’s focus on cost reduction is poised to enable sustainable profit growth in the long run.
As part of these efforts, Amazon is decentralizing its fulfillment and transportation network from a single national hub into eight distinct regions serving smaller geographic areas. This transition aims to expedite product deliveries to customers while reducing costs.
During the Q2 conference call, Amazon CEO Andrew Jassy reported, “Regionalization is working and has delivered a 20% reduction in the number of touches for our delivered package, a 19% reduction in miles traveled to deliver packages to customers, and more than a 1,000 basis point increase in deliveries fulfilled within the region.”
Ongoing improvements in fulfillment costs, coupled with the expansion of same-day fulfillment facilities, are anticipated to drive Amazon’s operational and financial performance, in turn sustaining the stock’s rally.
Final Thoughts on Amazon Stock
A majority of analysts who cover Amazon stock hold an optimistic view of its prospects. Among the 39 analysts covering AMZN, 34 recommend a “Strong Buy,” four suggest a “Moderate Buy,” and one maintains a “Hold” rating.
Nevertheless, the average price target for AMZN stands at $146.22, implying a modest upside of approximately 5% from current levels.
In conclusion, Amazon’s stock has already witnessed considerable appreciation in 2023. However, the positive momentum in its advertising segment, stabilization in AWS, and an ongoing focus on cost reduction contribute to a bullish perspective. These factors position Amazon’s stock as an appealing investment choice, suggesting it could outperform its current valuation.
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