Amazon (AMZN 0.81%) has become a very successful company since its 1994 founding. Its initial public offering (IPO) price was $0.075 (after adjusting for subsequent stock splits) in May 1997. Appreciating about 178,900%, it's trounced the S&P 500's roughly 750% total return.
However, that doesn't mean it will replicate this return. There's an investing axiom: Past success doesn't guarantee future results.
Hence, if you are contemplating purchasing the stock or even if you already own it, it's important to analyze Amazon's prospects and valuation to determine whether you should purchase, hold steady, or sell the stock.
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Cloud computing lead diminishes
Many people think of Amazon as an online seller of almost everything imaginable. However, its Amazon Web Services (AWS) has been growing quickly and generates most of the profits. Due to the need to invest heavily in data centers, the business has significant barriers to entry.
In the first half of the year, AWS' sales increased by 14% to $43.5 billion. The growth rate slowed down from recent years, including 29% in 2022, although it's still a faster rate than the North American and International segments. AWS accounted for 17% of Amazon's first-half sales but over 84% of operating profits. Still, the unit's income dropped from $12.2 billion to $10.5 billion.
Its major competitors are Microsoft's Azure and Alphabet's Google Cloud. Azure and Google Cloud have grown faster than AWS lately. In the latest quarter, Azure and other cloud services' sales increased by 26% and Google Cloud had a 28% top-line gain. AWS' second-quarter sales rose by 17%.
Although AWS still has a respectable growth rate, management said the business has been held back as customers grew cautious. While companies will continue to rely on data, and AWS still has the leading market share in cloud computing, I'd like to see AWS resume faster growth compared to Azure and Google Cloud.
Popular online site
Amazon has vast reach as a retailer, selling products online and through physical stores. It has built quite a reputation for low prices, convenience, and fast delivery.
The North American and international units saw second-quarter sales grow by 11% and 10% to $82.5 billion and $29.7 billion, respectively. They don't produce a lot of profit, though. North America earned only $3.2 billion, and the international division lost $895 million.
Recognizing the problem of rapid expansion, management has been addressing profitability by cutting costs. In the latest period, total operating expenses grew at a slower pace than sales. It will need to keep a watchful eye on expenses, as management previously hired and expanded aggressively.
Amazon's valuation
Amazon's stock price has increased by 58% since the start of the year, or about four times the S&P 500's gain. That outsized gain translates into a richer valuation. The shares sell at a forward price-to-earnings (P/E) ratio of over 61, compared to about 40 in January.
While that may be justified given Amazon's cost cutting and potential profit growth at AWS, the market has a lot of optimism that the company will grow quickly. If it doesn't come to fruition, shareholders could see a significant stock price drop.
I would sell the shares right now but keep a close eye on developments. If you see progress, particularly at AWS, and the valuation becomes more reasonable, it may prove a buying opportunity.
