Amazon: Worth Your Investment?

Amazon is one of the largest companies in the world, with a market capitalisation of $1.9 trillion. It is the world's second-largest retailer, behind Walmart, and is also a global leader in cloud computing.

Amazon's share price has been on a steady upward trajectory since its debut, and the company has split its stock four times since going public in 1997. The most recent stock split in 2022 reduced the share price from $2,300 to $115, making it more accessible to new investors.

Amazon's revenue has been increasing year-on-year, with a 13% increase in the first quarter of 2024. The company's investments in same-day delivery and cost-reduction strategies are also paying off, with operating income in Q3 2023 increasing by 343% year-on-year.

However, Amazon's stock suffered during the broader market downturn of 2022, and the company is facing increased competition from brick-and-mortar retailers like Walmart and Target, as well as upstarts like Temu and Shein. Amazon is also facing a major antitrust battle with US regulators.

Despite these challenges, most analysts consider Amazon stock to be a buy, with 95% of analysts holding a buy rating. The company's growing e-commerce and cloud businesses are expected to continue driving revenue and profit growth, making Amazon an attractive long-term investment for those who can afford the risk.

Amazon's investments in same-day delivery are paying off

The company's focus on speedy fulfillment has resulted in impressive metrics, with nearly 60% of orders placed through Prime in the top 60 US metro areas in the first quarter of 2024 arriving the same or next day. This is a notable increase from 50% in the second quarter of 2023. Amazon's investments in its fulfillment and transportation network have played a crucial role in achieving these "fastest Prime speeds ever."

The success of Amazon's same-day delivery strategy has had a positive impact on the company's performance. Customers are choosing Amazon more frequently to fulfill their shopping needs, leading to increased sales and revenue. This is evident from Amazon's financial results, which show a year-over-year earnings increase of 216% and a 13% sales increase for the quarter ending in March 2024.

Amazon's investments in same-day delivery have also contributed to the company's ability to compete in the online shopping market. By offering faster delivery speeds, Amazon has been able to retain shoppers and expand its customer base. This is particularly important as the company faces competition from rivals like Walmart and Target, who have also stepped up their delivery game.

Overall, Amazon's investments in same-day delivery are paying off by driving sales, improving customer satisfaction, and helping the company stay competitive in the dynamic online shopping market.

Amazon's cost reductions are boosting profits

Amazon's cost-cutting measures have been a significant driver of its improved profitability. Under the leadership of CEO Andy Jassy, the company has undertaken dramatic cost-cutting efforts, notably through slashing about 27,000 jobs. This has resulted in an impressive operating margin of 7.8% in the third quarter of 2023, nearing its record of 8.2% in early 2021.

Amazon's focus on cost optimisation is evident in its efforts to reduce advertising costs by identifying areas of overspending and reallocating ad dollars to high-performing campaigns. This strategy has led to a significant decrease in overall ad spend, paving the way for profitable growth. Additionally, Amazon has improved keyword targeting to ensure ads are not displayed for irrelevant searches, optimising its advertising campaigns further.

The company's shipping operations have also undergone a "regionalisation" effort, transitioning from a national model to eight distinct regions. This change has resulted in faster and cheaper deliveries by reducing the distance packages travel and the number of employees handling them, ultimately lowering the "cost to serve."

Amazon's advertising services, along with its Amazon Web Services (AWS) division, have been key to boosting profits. AWS, in particular, contributed two-thirds of Amazon's $37 billion in operating income in 2023, while accounting for only 16% of total revenue. The high-margin advertising business saw a 24% year-over-year jump in ad sales, contributing significantly to Amazon's bottom line.

While cost-cutting has been a central part of Amazon's strategy, it's important to note that increasing revenue is also crucial for the company's success. Amazon's growing sales have driven its stock price higher over the years, and its e-commerce business continues to expand briskly. The company generated $330 billion in total revenue in 2022 and is on track to overtake Walmart as the world's largest retailer as early as 2024.

In summary, Amazon's cost-reduction strategies have played a pivotal role in boosting its profits. By optimising operations, advertising campaigns, and shipping processes, the company has achieved impressive margins and set itself up for continued success.

Amazon's stock offers significant upside

Wall Street analysts expect Amazon to report cash from operations of $8.61 per share for 2023 and $13.37 per share by 2025. That would be a large increase, but one that would be consistent with the financial improvements the company has made over the last year as management has boosted operating efficiency and delivery speed.

Amazon's current stock price is around $155, and it trades at a valuation of 22.5 times cash from operations on a trailing 12-month basis through 2023's third quarter. That is towards the low end of the stock's 10-year trading range by that metric. Applying a price-to-cash-from-operations multiple of 22.5 to its 2025 estimates would put the share price at $294, or 91% higher than the current price. That would be an attractive return for an investment in the cloud and e-commerce leader.

It is uncertain if Amazon's valuation will return to the higher levels it frequently carried before the pandemic when the company was growing revenue faster than it is now. But all Amazon needs to do is continue showing solid improvement in operating margin and cash flow. Amazon has several ways to accomplish this beyond increasing its delivery speed and optimising its inventories. It still has a long runway of growth for its high-margin cloud services business.

Either way, the stock offers significant upside potential over the next few years.

Amazon's revenue growth

In 2022, Amazon generated $330 billion in total revenue, with its e-commerce business contributing the lion's share of this amount. Amazon's revenue growth has historically been impressive, with the company delivering more than double the average annual total return of the S&P 500 over the last decade (22.7% versus 10.2%).

Looking at more recent performance, Amazon's revenue continued to grow in the first quarter of 2024, reaching $143.3 billion, a 13% increase from the same quarter in 2023. This growth was driven by a 17% increase in AWS sales, which amounted to $25 billion. Amazon's net income also increased to $10.4 billion in the first quarter of 2024, or $0.98 per diluted share, compared to $3.2 billion, or $0.31 per diluted share, in the first quarter of 2023.

While Amazon's revenue growth slowed in 2022, with operating profit falling 51% year-on-year, the company still remains a strong performer. Amazon's revenue is expected to grow by 11% in 2024, reaching $638.8 billion. This growth is driven by the continued expansion of its e-commerce business and the increasing demand for AWS.

Amazon's profit projections

Amazon's revenue in 2022 was $330 billion, and the company is on track to overtake Walmart as the world's largest retailer. Its revenue is projected to grow by 11% to $638.8 billion in 2024. Amazon's operating income is also expected to climb by 68% to $62 billion in 2024, a significant increase from the 200% operating income growth in 2023.

The company's AWS segment, which includes global sales of computer, storage, database, and other services, is a key profit driver, contributing two-thirds of Amazon's operating income in 2023. AWS is also competing with Microsoft to be the leading cloud platform for generative AI, with Amazon investing an additional $2.75 billion in AI startup Anthropic in March 2024.

Amazon's retail business is also boosting profits, with its international operations posting operating income for the first time since 2021, and its North American operations contributing $5 billion in operating income, a 450% increase from the previous year.

Overall, Amazon's profit projections look positive, with expected growth in revenue, operating income, and continued investment in areas such as AI and cloud computing.

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