Advertising and Cloud Growth Propel Amazon to New Heights
Amazon Prime Day is set to kick off this week, and it’s expected to be a sales bonanza, but the real $2 trillion question is how profitably it can sell its diverse range of services. Prime Day, Amazon’s self-invented shopping extravaganza, begins on July 16. This event coincides with renewed investor enthusiasm, driven by robust sales growth and significant margin improvements, catapulting the stock price to record highs and pushing Amazon’s market cap past the $2 trillion mark.
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AI and Big Tech Drive Performance
The hype around artificial intelligence has undoubtedly contributed to Amazon’s recent performance. Alongside other tech giants like Nvidia, Microsoft, Apple, Google, and Meta, Amazon has seen its shares surge. Over the past 12 months, these companies have averaged a 65% gain, with Nvidia’s stock nearly tripling. These six companies collectively represent more than 31% of the S&P 500’s total market cap. Without their influence, the S&P 500 Equal Weight Index (RSP) has only seen a modest increase of just over 10% in the same period.
For Amazon, the recent surge represents a comeback. Its market cap approached $2 trillion three years ago when founder Jeff Bezos handed over the CEO role to Andy Jassy (July 2021). However, the stock plummeted, losing more than half its value as revenue growth slowed and a significant expansion of Amazon’s fulfillment network during the COVID-19 era weakened earnings. Amazon’s operating margin dropped from 8.2% in the quarter before Jassy took over to 2% by the end of 2022.
Amazon Prime Day – Betting on Growth
Investors are now betting that Amazon won’t revert to an “investment mode” that prioritizes growth over profitability. Over the past four quarters, Amazon’s operating income has surged by triple-digit percentages, with projections indicating it could surpass $62 billion this year. This equates to an annual operating margin of nearly 10%, a significant improvement from the 5% average over the past five years. Wall Street expects these margins to remain in double digits and continue expanding through at least 2027.
Amazon Prime Day is expected to contribute approximately $13.3 billion in global sales this year, a 3% increase from last year, according to estimates. However, Amazon’s true profitability boost lies in its advertising and cloud businesses. These segments are displaying strong momentum, with corporate cloud-computing demand and the burgeoning AI market projected to drive AWS cloud revenue up nearly 18% this year, compared to 13% growth last year.
Advertising: A Major Growth Engine
Amazon’s advertising segment, which brought in sales of $47B in 2023, is poised for further growth with the introduction of ads on its Prime Video streaming service. Jefferies analyst Brent Thill estimates that Amazon Prime Video alone could generate about $2.9 billion in new ad revenue for Amazon this year. Additionally, advertising-industry analyst Brian Wieser suggests that a new service designed to counter competitors like Temu and Shein could further boost ad revenue, as Chinese merchants seek to enhance their sales on Amazon’s platform.
Valuation: A Cheaper Look at $2 Trillion
Despite a market cap of $2 trillion, Amazon’s rapidly expanding bottom line has made its valuation seem more reasonable versus the last time the stock approached a $2T valuation. Currently, the stock trades at less than 40x projected earnings for the next 12 months, a stark contrast to the 67x multiple when its market cap first crossed the $1 trillion threshold in early 2020. While Amazon still trades at a premium compared to Microsoft, Apple, and Alphabet, the gap has narrowed as the company’s earnings have improved.
At $2 trillion, the Everything Store presents a compelling value proposition, with its diverse and growing revenue streams from retail, advertising, and cloud services. Investors have every reason to feel optimistic about Amazon’s future prospects.
Conclusion
Amazon’s latest surge past the $2 trillion market cap is more than just a result of Amazon Prime Day hype. It’s a testament to the company’s strategic pivot towards profitability, driven by robust growth in its advertising and cloud businesses. As Amazon continues to innovate and expand, it offers a compelling investment case, balancing growth with profitability in a way that makes its lofty valuation seem not just justifiable, but potentially even undervalued.
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