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Amazon (AMZN -0.36%) In 2023, the stock price rose about 75%, or about three times the total return. S&P500 index. After a tough 2022, the stock has seen a big turnaround as the e-commerce and cloud computing giant finally expanded its profit margins and once again generated positive free cash flow. The company’s market capitalization now exceeds $1.5 trillion, making it the fifth most valuable company in the world.
You may be under the impression that you’ve missed out on Amazon’s inventory as inventory has increased significantly. But just because a stock’s price has risen significantly doesn’t mean you should avoid buying it. Will Amazon be the one to beat the market again in 2024? Let’s take a closer look.
Continuously improving profit margins in e-commerce
Amazon has its hands in many pies. For example, the company is currently investing heavily in healthcare and satellite internet services. But now his two segments, e-commerce and cloud computing, are driving the entire business.
People have long been skeptical about Amazon’s e-commerce division, arguing that it has always been difficult to generate profits due to the prohibitive costs associated with building a vertically integrated online shopping platform. This is especially true in the United States because the population is geographically dispersed.
In late 2023, the company showed those fears were misplaced. Amazon’s e-commerce division is seeing margin expansion, driven by increased sales from the size of its logistics footprint, surging advertising revenue and high-margin third-party seller fees. At least it exists in North America.
Last quarter, Amazon’s North American division’s operating margin was 4.9%, up from -0.5% in the same period last year. With sales of his $340 billion in the past 12 months, an operating margin of 5% equates to $17 billion in operating profit for this division.
There’s no reason to think this margin expansion won’t continue. Amazon is still grappling with the massive capacity additions that occurred during the coronavirus pandemic and has seen significant growth through advertising and third-party sales. Given how profitable these revenue streams are, it’s no surprise that Amazon’s North American division will have operating margins of 10% at some point in 2024. This translates to $34 billion in revenue from its North American retail operations alone.
Although online shopping is expected to continue gaining market share over the next decade, it still only accounts for 20% of total retail sales. This means Amazon is still enjoying industry tailwinds after all these years, and its revenue should continue to grow at even higher levels in the coming years.
Cloud growth remains underestimated
Amazon’s most profitable division is its cloud computing division, Amazon Web Services (AWS). With operating margins of over 25% approaching $100 billion in revenue, this in itself would be one of the most profitable businesses in the world.
Investors were concerned about slowing sales growth for AWS, which saw revenue rise only 12% year-on-year last quarter. This feels shortsighted. AWS is the computing backbone for many of these companies, so they were feeling the slowdown in venture capital funding and the software sector. Additionally, in collaboration with struggling customers, Cloud began working to reduce computing charges, which slowed revenue growth.
Despite these headwinds, the division still grew sales by 12% year over year. As cloud computing continues to take market share from legacy computing solutions, the artificial intelligence (AI) boom, and the general increase in computing needs around the world, AWS is poised to grow at double-digit rates for the foreseeable future. It looks poised for revenue growth.
If AWS reaches $200 billion in sales within five to six years, which seems achievable as long as it maintains market share, Amazon’s operating profits for this division could exceed $50 billion. It will be quite a profit machine.
AMZN PE Ratio Data by YCharts. P/E = price/earnings ratio.
But are stocks cheap?
Put simply? yes. At least, if there is a multi-year period. Amazon’s market capitalization is $1.56 trillion, and its price-to-earnings ratio (P/E) is 78 times, making it seem expensive at first glance. But those who only look at the tail end of the P/E ratio fail to appreciate the rapid expansion of margins in e-commerce and the huge growth potential that remains in the cloud computing sector.
Assuming North American retail margins are 10%, revenue reaches $34 billion, and cloud computing revenue soon reaches $25 billion, Amazon’s total revenue would be $59 billion. We also assign zero value to international retail operations and moonshot bets such as Kuiper Satellite Internet and Healthcare. Dividing $1.56 trillion by $59 billion yields a P/E of 26, which is roughly in line with the market average and much more favorable than a P/E of 78.
Remember, Amazon still has plenty of runway to grow its sales, which would also reduce the value of its AWS and non-North American retail subsidiaries to zero. With this in mind, I think Amazon stock remains cheap and has a good chance of outperforming the market again in 2024. Don’t sleep on this tech giant.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Brett Shafer has a position at Amazon. The Motley Fool owns a position in and recommends Amazon. The Motley Fool has a disclosure policy.
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