With a valuation of $1.3 trillion, Amazon (AMZN 0.28%) is one of America's largest corporations. While it started out in e-commerce, the company is now also a dominant player in cloud computing, advertising, and even streaming.
Amazon recently reported its financial results for the third quarter of 2023 (ended Sept. 30), and its stock jumped almost 7% higher on the day of the release. It was a better reaction than most of the company's tech-giant peers received after they released their results. Here are four reasons investors are likely to continue buying Amazon stock.
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1. Online retail is bouncing back
The global economy has struggled with elevated inflation and rising interest rates over the last 18 months. Consumers are undoubtedly feeling the impact as the prices of everyday goods and services continue to soar, and the knock-on effects are hitting retailers like Amazon.
But there are some early signs that the worst might be behind us. Inflation has come down considerably from its 40-year high set in June 2022, and some experts predict the U.S. Federal Reserve could start cutting interest rates in the middle of next year.
Amazon's third-quarter online (e-commerce) sales also suggest better times might be ahead. They grew by 7% year over year, marking an acceleration from the first and second quarters, when sales grew by 3% and 5%, respectively.
Despite Amazon diversifying into other businesses, e-commerce is still extremely important as it makes up 40% of the company's overall revenue. But rather than throwing money at the segment to ignite growth, Amazon is carefully investing to improve its efficiency. For example, it broke its single U.S. fulfillment network into eight regional networks, which is driving costs down and also speeding up delivery times to customers.
Faster delivery leads to more sales, as consumers often prioritize convenience in their online shopping experience. That could drive a further acceleration in revenue growth going forward.
2. Amazon Web Services' growth is stabilizing with the help of artificial intelligence
Amazon Web Services (AWS) is Amazon's cloud computing division. It provides hundreds of different services to businesses all over the world. They can use AWS to store data, host websites, develop software, and even access advanced artificial intelligence (AI) tools.
AI is becoming increasingly important for AWS as businesses seek cost-effective ways to access the technology to boost their productivity. Amazon recently invested $4 billion in generative AI start-up Anthropic, which develops large language models and chatbots similar to OpenAI's ChatGPT. The deal is set to significantly accelerate Amazon's AI progress.
The start-up will use Amazon's Trainium and Inferentia semiconductors to develop and train its AI models going forward, which will help encourage other developers to choose Amazon's hardware over Nvidia's, for example. Plus, all of Anthropic's latest models will be made available on AWS Bedrock, where cloud customers can build upon them for their own purposes.
Building large language models requires substantial amounts of data and financial resources, so they're out of reach for most businesses unless they can access turnkey third-party options, like those now available on AWS.
After a consistent slowdown over the past year, AWS revenue grew by 12% in Q3 for the second consecutive quarter, which is a sign it's beginning to stabilize. Plus, Amazon CEO Andy Jassy said that while businesses are still hesitant to increase their cloud spending amid the uncertain economic climate, he likes the momentum he's seeing on the deal side. That could point to a growth acceleration into the end of 2023.
Image source: Getty Images.
3. Amazon's advertising business continues to grow rapidly
Investors are paying an increasing amount of attention to Amazon's digital advertising business. It generated $12 billion in revenue during Q3, which was a 26% year-over-year increase, making it the company's fastest growing segment.
Amazon's portfolio of media assets continues to expand. It owns the Prime streaming platform, the Twitch streaming platform, and Amazon Music, a Spotify competitor, to name just a few. Its portfolio of premium content also continues to grow; the NFL's Thursday Night Football attracted 15.1 million viewers on opening night in September, which was an Amazon Prime record for the program.
All of those properties could create a lucrative base for Amazon to sell advertising spots. In September the company announced it would be integrating video ads into the Prime streaming service starting in 2024 to further monetize its estimated 200 million members.
But the biggest media asset of all is the amazon.com website, which attracts 2.3 billion monthly visits. It's the ideal place for businesses to advertise their products, and Jassy said Amazon just launched a generative AI tool to help them craft more engaging content for their ads. This could drive better conversions, which would lead merchants to spend more money on the platform.
4. Amazon was wildly profitable in Q3
Thanks to the growth in e-commerce, AWS, and advertising, Amazon's total Q3 revenue grew by 13% to $143.1 billion, which was faster than Wall Street expected. Combined with a series of cost cuts and efficiency measures implemented over the past year, the success on the revenue side led to an incredibly profitable third quarter for Amazon.
Its operating income came in at $11.2 billion, a whopping 343% increase from the same time last year. AWS was the leading contributor as always, with $7 billion in operating income on its own despite accounting for just 16% of Amazon's total revenue. Cloud computing is a high-margin business, and the continued adoption of AI products and services will likely make the segment even more important for Amazon.
Amazon has now generated $1.92 in trailing 12-month earnings per share, which means its stock trades at a price to earnings (P/E) ratio of 66.5. That's still more than twice the P/E ratio of the Nasdaq-100 technology index, which trades at 28.9, but it's down substantially from earlier this year when it was in the triple digits.
Amazon's guidance for the fourth quarter of 2023 points to another strong operating income result, which means its stock looks even cheaper on a forward basis. In fact, Wall Street analysts predict the company will deliver $2.96 in earnings next year, which places Amazon stock at a forward P/E of 43.1.
While that's still a premium to the broader market, investors are buying into one of the most diversified technology companies in the world, one that is delivering strong top- and bottom-line growth. Not to mention AWS is positioning itself as a leader in AI, which could be a major financial opportunity in the future.
With Amazon's core businesses now on the upswing, this could be a great time for investors to buy the stock.
