With the shares tanking to start the year, Amazon (AMZN 0.02%) delivered the results investors wanted to see. The tech titan posted better-than-expected operating profit for the fourth quarter. The good news has sent the stock price up 13% to $3,100 at the time of writing. Can the stock head back toward its all-time high of $3,773?
It's tough to predict short-term price movements, but looking at the areas where Amazon is experiencing the highest growth, the company's performance certainly has the potential to push the stock to new highs over the next few years.
Image source: Getty Images.
Watch these catalysts
The two segments investors should watch are Amazon's cloud services business (Amazon Web Services) and digital advertising. Both segments continue to look strong moving into 2022, and each business is accretive to Amazon's profitability.
Growth at Amazon Web Services (AWS) accelerated year over year, with revenue growth improving from 28% in Q4 2020 to 40% in the most recent quarter. The segment is highly profitable, contributing $5.3 billion of operating profit on top of $17.8 billion of revenue in the fourth quarter.
This momentum should continue, as more corporations shift their data systems over to the cloud. Facebook parent Meta Platforms recently selected AWS as its strategic cloud provider to accelerate its investments in artificial intelligence research and development.
Next up, advertising. Amazon broke out advertising revenue in its latest quarterly report for the first time. It grew 33% year over year to reach $9.7 billion in the fourth quarter. The company didn't break out segment-level operating income, but it credited advertising growth for partially offsetting the decline in the company's total operating profit last quarter, which clues investors in that this is a high-margin business.
Amazon provides advertising services to sellers, suppliers, publishers, authors, and other parties. Specifically, management sees an opportunity to grow video advertising across various platforms that Amazon operates, including Fire TV, IMDb TV, and the live-game streaming service Twitch. Live sporting events on Prime Video could be another big opportunity, given Amazon's 11-year agreement with the NFL to stream Thursday Night Football.
The potential upside
Growth in these two high-margin services (AWS and advertising) are two important catalysts that could significantly boost Amazon's profitability. Revenue from AWS and advertising, combined, made up 20% of total sales in the fourth quarter, but at the rates they are growing, these segments will become very important to Amazon's business over time. Without AWS, Amazon would have reported a total operating loss of $1.8 billion in the fourth quarter instead of a gain of $3.5 billion.
Analysts are expecting Amazon's cash from operations to expand significantly over the next two years. Based on the current consensus estimate, cash from operations per share is expected to reach $190 by 2023.
Since 2005, Amazon has traded in a range of 20 to 35 times cash from operations per share. Applying a 25 multiple to the 2023 consensus estimate of $190 gives a projected share price of $4,750. For what it's worth, the average near-term price target of Wall Street analysts is $4,201.
So, yes, Amazon's share price can absolutely head higher from current levels. Of course, a bear market could cause the stock to hit new lows before it heads higher, but I believe Amazon offers great value at its current price level for investors who can hold for at least five years to ride out any near-term volatility in the broader market.
