The "Magnificent Seven" stocks had a phenomenal 2023, but 2023 is wrapped up. That means we need to look toward a new leader in 2024, and of the group, I think it will be Amazon (AMZN -1.07%). That's a tall order, especially considering the other six members of the group are:
- Microsoft
- Apple
- Alphabet
- Nvidia
- Tesla
- Meta Platforms
That's a solid lineup of companies to outperform, but Amazon can do it if it accomplishes a few goals.
Cloud computing revenue needs to grow
Most people know Amazon as an e-commerce company, but it's a lot more than that. One of the most exciting growth prospects Amazon has had recently is its cloud computing business, Amazon Web Services (AWS).
AWS was Amazon's growth engine for many years, as the wide-scale adoption of cloud computing resources boosted it. However, the expansion happened quickly, and many users weren't optimally utilizing the service. When many clients pushed to become more efficient, Amazon obliged and helped them optimize their usage, which often meant cutting resources. This practice hurt Amazon in the short term, as its revenue growth was consistently in the low teens throughout most of 2023.
While that practice caused some short-term pain, it was a great strategy to maintain customers for the long term. Additionally, management sees this optimization trend wrapping up. New workloads are coming online, boosting AWS's growth rate throughout 2024.
This is critical, as Amazon is losing market share in a massive opportunity. At last calculation, Synergy Research Group found that Amazon controlled 32% of the cloud computing market, while Microsoft's Azure and Alphabet's Google Cloud controlled 22% and 11%, respectively. With Azure growing at 29% and Google Cloud at 22% in the third quarter (Microsoft's fiscal first quarter aligns with calendar year Q3), each competitor is chipping away at Amazon's lead as it only grew 12% in Q3. However, with the cloud computing market opportunity estimated to be about $1.27 trillion by 2028, there's plenty of market to go around.
AWS should bounce back in 2024, and if it can match its primary competitor's growth rates, expect the stock to rocket higher in response.
Amazon must sustain margin improvements
Another positive note for Amazon was its steady profit margin increase in 2023. When CEO Andy Jassy took over from founder Jeff Bezos in the third quarter of 2021, he inherited a bit of a mess, as Amazon had overspent on several growth measures. As a result, profits plummeted. However, Jassy was hyperfocused on becoming more efficient and turning a consistent profit. While this vision took over a year to come to fruition, it's starting to show now.
AMZN Gross Profit Margin (Quarterly) data by YCharts.
Amazon's profit margins are climbing to levels previously unreached. Furthermore, even when Amazon had high profit margins, they weren't sustainable.
Amazon in 2024 is much different than the Amazon of 2020 and 2021. Now investors will see in 2024 their first look into what a consistently profitable Amazon looks like.
Despite these gains, Amazon's stock trades at a historically attractive price-to-sales valuation.
AMZN P/S Ratio data by YCharts.
With Amazon not trading above historical valuations, unlike most members of the "Magnificent Seven," plus several tailwinds on its revenue and profits, Amazon looks poised to outperform its peers in 2024.
