Amazon (AMZN +0.30%) investors have had a good year so far. Shares of the tech giant are up over 50% in 2023, compared with a 29% increase in the Nasdaq Composite Index. That rally suggests that Wall Street sees a bright future ahead for this business, which has exposure to several long-term growth niches including cloud services, e-commerce, and digital entertainment.
It's anyone's guess where Amazon's shares will be a year from now. Yet the latest operating trends point to a few factors that seem likely to drive returns over that time. Let's take a closer look.
More about services
Amazon has been transitioning its business toward a service model for some time, and this shift has accelerated in recent quarters as e-commerce demand slowed. Net product sales barely increased in the past six months, for example, rising to $116 billion in the first half of 2023 from $113 billion a year earlier.
NASDAQ: AMZN
Key Data Points
In contrast, Amazon's services segment, anchored by its Amazon Web Services platform, is bigger and expanding at a much faster pace. That division grew to $146 billion from $125 billion through fiscal Q2 and accounted for most of its growth in that period. It seems reasonable to assume, then, that Amazon's business will be even more tilted toward services by this time next year, even assuming e-commerce growth returns to a more normal pace.
More profits and cash
That tilt toward services is helping boost profitability, which is also likely to continue rising. Operating income more than doubled last quarter to $7.7 billion, after all, and Amazon flipped a $2 billion loss to a $7 billion profit year over year. "It was another strong quarter of progress for Amazon," CEO Andy Jassy said in an early August press release.
Amazon executives prioritize free cash flow, and the news is even better on that score. After declining sharply into early 2022, losses on this metric have improved in each of the past four quarters culminating in an $8 billion cash inflow this most recent quarter. Given these trends, shareholders might expect to see higher earnings and cash flow over the next year or so.
A higher stock price?
Amazon's stock price movement is much less predictable since it will be driven by factors such as wider economic growth trends and investors' shifting sentiments.
On the bearish side, the company is one of the least profitable tech giants around, potentially setting investors up for weak returns in the short term. If you want exposure to Web services or the consumer tech industry, you could own far more profitable Microsoft or Apple, for example.
AMZN Operating Margin (TTM) data by YCharts
On the other hand, bulls will say that Amazon's progress toward higher margins and record cash flow will support market-beating returns over time, which is likely to extend the stock's positive momentum through 2023.
But wherever you land on that key question, there's less uncertainty around the idea that Amazon will be a larger, more financially impressive business in the future. Steady progress along those lines is the surest path toward excellent returns for patient shareholders who own the stock into 2024 and beyond.
