Why Is Amazon Stock a Buy Now?

Trillion-dollar online retailer Amazon.com, Inc. (NASDAQ:AMZN) has come a long way since its humble beginnings.

Currently with a $1.8 trillion market capitalization, it’s hard to imagine that the company started in the 1990s as an online bookseller out of Jeff Bezos’ garage in Bellevue, Washington.

As has been the story since its creation, the company has not shied away from expansionary endeavors. This explains Amazon’s successful venture into cloud services through Amazon Web Services (AWS), which is facilitating America’s digital journey.

Despite concerns over cloud-cost optimizations, the AWS business generated a healthy operating income in its last reported quarter.

 

Amazon’s share price has also enjoyed rapid acceleration. Over the past year, the stock has been up more than 80%, currently hovering near its 52-week high.

Is it the right time to enter the stock?

Will The Amazon Rollercoaster Ride Continue?

In the recent past, Amazon has gone through its ups and downs, from global lockdowns significantly boosting online sales to interest rates pressuring operations.

Despite inflationary pressures and labor supply shortages, the company posted a net income of $33.36 billion for the fiscal year 2021, thanks to stellar growth in the AWS segment (40% year over year). At the time, management was optimistic about its prospects going forward.

However, an uncertain economy hit its financials, and Amazon posted a net loss of $2.72 billion the following year. The top brass cited a pre-tax valuation loss of $12.70 billion, which included non-operating expenses from the common stock investment in Rivian Automotive, Inc. (NASDAQ:RIVN).

The e-commerce giant had to turn its attention toward cost optimization. CEO Andy Jassy is actively trying to slash costs.

Between late 2022 and mid-2023, Amazon reportedly cut more than 27,000 jobs amid a broader tech downsizing as inflation and multiple interest rate hikes rampaged corporate performance. It has also recently cut “a few hundred roles” across its One Medical and Pharmacy units.

In 2022, another major development took place when the company initiated a 20-for-1 split of its common shares, which took effect on June 3, 2022. The stock started trading on a split-adjusted basis on June 6. 

Since then, the company has recovered quite a lot of its lost ground. Inflation coming down from its peak and a somewhat softening of the Fed’s strict stance helped.

Consumers remained resilient, which culminated in a record-breaking Black Friday and Cyber Monday holiday shopping event for the company. Customers bought more than one billion items on Amazon.

For 2023, the company posted a massive turnaround from its more than $2 billion losses in the prior year, posting a net income of $30.43 billion. Its AWS segment registered the highest contribution to operating income, with a total of $24.63 billion.

On top of it, free cash flow registered an inflow of $36.80 billion for the year, underscoring a significant improvement when compared to an outflow of $11.60 billion for the trailing twelve months that ended on December 31, 2022.

Notably, the company’s performance also topped analyst expectations. Its most recent Q4 $169.96 billion revenue beat the consensus estimate by 2.2%, while its earnings per share of $1 were a stunning 24.4% above the analyst estimates. 

Looking forward, for the current quarter, Amazon expects net sales to grow 8-13% year-over-year to between $138 and $143.50 billion. Operating income is expected to be $8 to $12 billion, almost doubling from the prior-year period, even at the lower range.

Will Amazon Keep Growing?

As a testament to the company’s drive to expand operations and foray into new ventures, Amazon is finding new avenues and plans to bolster its operations this year.

Notably, it is not done with striving to lower costs further and provide faster deliveries to its customers, eyeing further upside in its fulfillment network.

Amazon also has significant AI aspirations. In 2024, Amazon’s CapEx is expected to increase due to increased infrastructure CapEx to support AWS, which includes investments in generative AI and large language models (LLMs).

The company has a generative AI application in its fulfillment centers that projects required inventory levels. Another notable launch is Rufus, a generative AI shopping assistant, which is on the verge of commercial rollout. Last year, it made a $4 billion investment in Anthropic, an AI research company.

AWS is set to expand globally through the impending launches of infrastructure regions in several parts of the world. The most recently announced AWS Region is set to be in Saudi Arabia, with 18 more planned areas to be tapped.

Jeff Bezos Is Selling, Should You?

Amazon’s founder and executive chairman, Jeff Bezos, sold 50 million of the company’s common stock last month, the first time doing so since the year he stepped down as the CEO of the company. The transactions were carried out over February at an approximate price range of $166-$175 per share.

While insider selling is seen as an unfavorable indicator of the company’s prospects, it might not always be the case. In this instance, Amazon does not seem to be the reason for the shedding of shares. Bezos has actually invoked Rule 10b5-1(c), which allows insiders to sell stocks at a specific date or price.

This trading plan, set in place by Bezos on November 8, 2023, gave him the right to sell up to 50 million shares before January 31, 2025.

While it’s not clear why he chose to do this, the action should not impact Amazon’s long-term investors. Notably, Bezos still owns 938.25 million shares of the company. He may very well simply need further liquidity to financially support is Blue Origin firm, a SpaceX competitor.

Why Is Amazon Stock Doing Well?

Amazon stock is doing well because CEO Andy Jassy has aggressively cut costs and is expanding internationally, such as to Saudi Arabia, resulting in higher revenues and more profits.

Looking at the way Amazon is diversifying operations and how its cloud business is performing, with significant AI prospects, the stock could be a long-term portfolio addition now. Moreover, although it is trading close to its 52-week high of $180.14, its consensus price target of $204.73 indicates a 17.6% upside potential.

Of the 47 analysts providing recommendations for Amazon, 45 recommend buying it, and two rated as a Hold.

Although its forward non-GAAP P/E ratio of 41.55 seems quite expensive compared to the industry average, it is actually much lower than the five-year average of 185.28. Hence, while the company strives to achieve operational excellence, it might be wise to stock up on some of its shares.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.