Shares of e-commerce and cloud computing behemoth Amazon (AMZN +1.93%) have gained by 76% so far in 2023 -- a remarkable recovery after losing nearly half of their value in 2022. (The stock is down about 8% over three years but up 75% if you stretch the look-back to five years.)
The company's recent quarterly results (for the three months ending Sept. 30) were stellar, with revenue and earnings handily surpassing consensus estimates. The company's free cash flow exploded to $21.4 billion in the 12 months ending Sept. 30, compared to negative $19.7 billion in the previous year. in the same quarter of the prior year.
NASDAQ: AMZN
Key Data Points
Perhaps not surprisingly, billionaires have been buying shares of Amazon. Here are a few possible reasons why smart money is enamored with Amazon now.
Its e-commerce business is improving rapidly
According to the Federal Reserve, e-commerce sales made up only 15.6% of overall retail spending in the U.S. in the third quarter, implying that there is much potential for expansion. As the e-commerce leader with a nearly 38% share of U.S. online sales, Amazon stands to benefit from any increase in e-commerce activity.
In the third quarter, Amazon reported an operating margin of 4.9% for its North American segment (including sales, subscriptions, and advertising), up year over year by 100 basis points. The improvement in margins marks the success of the company's regionalization strategy in the U.S.
The company has revamped its U.S. fulfillment strategy, transitioning from a single national fulfillment network to eight regionalized fulfillment networks. By focusing on optimal stocking levels at regional centers, reducing distances between fulfillment centers and delivery stations, and increasing volumes on optimal delivery routes, Amazon has managed to reduce its cost while improving delivery times. The company has said that improved delivery speed is also translating into more frequent purchases by Prime members, which should mean more revenue for the company. Amazon is also working to increase productivity and operational efficiencies for its international e-commerce business, which is now close to reaching breakeven.
To further bolster its e-commerce business, Amazon has been leveraging AI tools to help customers with product discovery on its online marketplace and to optimize inventory and logistics management. Amazon's AI tools are also helping third-party sellers to rapidly create new product pages on its website.
AWS is a major growth catalyst
A leader in the cloud infrastructure services market, Amazon Web Services' business continued to stabilize in the third quarter. While AWS' revenue was affected due to businesses reducing their cloud spending in the previous year, Amazon is now seeing enterprises again shifting new workloads to the cloud. The company also witnessed an increased number of new deals for AWS in September and October.
Amazon aims to make AWS a dominant cloud player in the generative AI space. The company has invested nearly $4 billion in Claude 2 chatbot developer Anthropic, which will use AWS as a primary cloud provider for training and deploying its large language models.
Amazon has launched the Amazon Bedrock service, which gives its customers access to large language models from several third-party providers, including Anthropic, Meta Platforms, Cohere, A121, and Stability AI. The company's expanded collaboration with Anthropic also gives AWS customers early access to customization, fine-tuning, and other unique features for the latter's future models. With Bedrock, clients can experiment with multiple models and find the right fit for their organizations to build and scale enterprise-ready generative AI applications.
Prime Video can become a substantial revenue stream
CEO Andy Jassy said during the company's recent conference call with analysts that Amazon has "increasing conviction" that Prime Video -- which is offered as a perk to Prime members -- can "be a large and profitable business in its own right..."
Amazon has not only been creating exclusive content for the service, but is also offering customers the choice to subscribe to other premium video streaming channels such as Max, BET+, Paramount+, and MGM+ . In early 2024, the company plans to start with limited advertisements on shows and movies on its streaming platform. Customers wanting an ad-free experience will be required to pay an additional $2.99 per month in the U.S.
While the revenue from these moves may remain limited in the short run, there's the potential for big gains. Back in June -- when rumors of the ad-supported tier first surfaced -- analysts at Morgan Stanley estimated that an ad tier could bring in roughly $4.8 billion in revenue in a year.
Valuation is reasonable
Amazon is currently trading at a price-to-sales (P/S) ratio of 2.74, lower than its five-year average P/S ratio of 3.
Considering the improving profitability of the e-commerce business, stabilization trends in the cloud computing business, new revenue streams from Prime Video, ongoing infusion of the company's core offerings with AI capabilities, and lower-than-historical valuation multiples, this billionaire-favorite stock could also prove to be a good pick for retail investors.
