Determining what your top stock would be if you could only have one is a useful exercise for investors. It identifies your risk tolerance, what ideas you hold to be true, and other biases. For me, other stocks may have a higher upside in 2024, but in my mind, they aren't as much of a lock as Amazon (AMZN 0.03%).
Amazon has rapidly become an incredibly profitable business, reaching levels no one has ever seen. I'm excited to see what 2024 has in store for Amazon, and it's one of my top stock picks for 2024.
Amazon has three main businesses driving its improvement
It's hard to determine what the most exciting part of Amazon's business is heading into 2024.
On the commerce side, Amazon transformed itself from an e-commerce business to an e-commerce fulfillment company. What's the difference? Well, instead of buying the inventory itself and selling it to consumers, it is outsourcing that practice to third-party sellers, so it isn't responsible for product innovation or inventory. Instead, Amazon becomes the platform these businesses sell on, and then Amazon stores the products in its warehouses and delivers them to customers.
This segment, known as third-party seller services, grew 20% year over year in the third quarter. While it's still about three-fifths the size of Amazon's online stores (where it purchases the products), the online store's segment only grew 7% in Q3, which showcases Amazon's changing business model.
Another growing part of Amazon's business is its advertising services, which grew 26% to $12 billion. This is Amazon's fastest-growing and fourth-largest segment, even bigger than subscription services (which includes Prime memberships). Although Amazon doesn't break out segment margins, we know from other businesses whose primary product is advertising, like Alphabet (Google) and Meta Platforms (Facebook), that advertising is a much higher-margin business than commerce. Advertising growth is key, allowing Amazon to further improve its margins.
Lastly is Amazon's most lucrative business segment, Amazon Web Services (AWS). AWS is a cloud computing offering that allows clients to rent computing power and data storage for a modest fee. In the age of artificial intelligence models being created for nearly every business, cloud computing is a vital part of the picture. AWS allows its users to collect data, process it, create models, then implement them into their systems. However, 2023 hasn't been kind to AWS.
Throughout the year, efficiency was a focus for many clients, so instead of risking losing their customers, Amazon helped streamline its clients' usage of AWS products. While this caused revenue growth to slow, management is seeing this trend slow down as new workloads are launched. This will allow AWS to return to rapid growth mode in 2024, which will be a huge driver for Amazon.
While these three parts aren't commonly thought of when considering Amazon, they are some of its most important factors. The trio's growth will also lead Amazon to do something it has never done before.
Amazon's profit margins are nearing all-time highs with no artificial boosts
The rise of higher-margin businesses combined with various efficiency efforts dramatically improved Amazon's margins. In fact, the three main margin metrics (gross, operating, and net) are all approaching all-time highs.
AMZN Gross Profit Margin (Quarterly) data by YCharts
However, Amazon's highs in these metrics were set in 2021, when the stay-at-home trend caused by the COVID-19 pandemic artificially boosted Amazon's business. In 2023, no tailwinds are inflating Amazon's profit picture, just strong execution.
Despite that, Amazon's stock trades at a fairly low price-to-sales ratio level.
AMZN PS Ratio data by YCharts
Back in 2016, Amazon wasn't nearly as profitable (although it was growing faster). Still, no one has seen what a consistently profitable Amazon looks like, although we may get a glimpse of that in 2024. With the amount of profits this business can produce, I think it has a chance of cementing itself as one of the best stocks to own in the market.
Are there other stocks that I think have more upside? Absolutely. But none of those stocks are as surefire as Amazon is in 2024.
