Somewhat quietly, Amazon (AMZN 0.30%) had a monster year in 2023. The tech stock didn't get as much attention as AI stocks like Nvidia, and it wasn't part of the battle royale playing out between Microsoft and Alphabet in generative AI chatbots. However, Amazon finished 2023 up 81%.
The recovery was due to a sharp sell-off in the stock in 2022 that left it oversold, and an impressive recovery in its profit margins in 2023. Those came from its greatest cost-cutting effort to date, which included laying off roughly 27,000 employees and closing experimental businesses like its Scout home delivery robot and Amazon Care healthcare clinic. It also gained leverage by growing into warehouse capacity that it built during the pandemic.
Heading into 2024, investors might be wondering if Amazon is still a no-brainer buy. Let's look at some of the factors that will affect the stock this year.
Image source: Amazon.
More room for margin growth
If founder Jeff Bezos' leadership was characterized by the aggressive pursuit of market share at the expense of profits, current CEO Andy Jassy's strategy seems to fly in the opposite direction.
Since he took over the company in 2021, Jassy has primarily focused on monetizing the company's existing businesses and squeezing more profits out of them. In particular, he has focused on high-margin businesses like its third-party marketplace; advertising; and Amazon Web Services (AWS), its cloud computing business. He has also cut back on money-losing projects like Alexa.
Jassy still has more opportunities to leverage Amazon's earlier investments to grow the bottom line. For example, at the end of the month, Amazon is planning to add advertisements to Prime Video unless subscribers pay to opt out of them.
The move makes sense. Amazon has built a vast advertising network on its e-commerce site, so it has relationships with both large brands and small online sellers. Ad-based streaming is becoming more common as peers like Netflix, Walt Disney, and Warner Bros. Discovery's Max have all added ad-based tiers recently.
Amazon recorded an operating margin of 7.8% in the third quarter, which was nearly a record for the company, and its margins should naturally improve as it leverages infrastructure like its logistics network and its cloud data centers that power AWS.
Amazon and the AI opportunity
Artificial intelligence (AI) also looks like a substantial opportunity for Amazon, much like it does for the big tech sector. But the company's efforts in AI thus far have not attracted as much attention as some of its competitors have.
Its primary AI-focused business is Amazon Bedrock, a cloud-based service allowing users to build generative AI applications using foundation models. It has also designed its own AI chips for model training and inference, and it agreed to invest up to $4 billion in Anthropic, an AI start-up best known for its chatbot Claude, a competitor to ChatGPT.
Bedrock seems like a smart way to extend AWS capabilities into AI, though it's unclear how much adoption the company has seen so far with Bedrock. The Anthropic investment, meanwhile, looks a little like the company is trying to play catch-up in the AI chatbot race, since Alphabet had earlier invested in Anthropic and Microsoft has a close partnership with OpenAI.
Is Amazon a buy in 2024?
Amazon still looks expensive on a conventional basis, trading at a price-to-earnings ratio of 78. But that valuation seems justified by the company's history of superior growth and the potential for margins to continue to ramp up.
The company's financial results have been notoriously difficult to predict, and that's likely to be the case in 2024 as well. Still, Jassy's strategy and the broader operational leverage in the business seem likely to continue to pay off this year, and a recovery in the broader economy would be helpful for Amazon as well, since growth at AWS has slowed due to cautious spending by businesses.
While investors shouldn't expect Amazon to rack up another 81% gain in 2024, the stock looks like a good bet to move higher in 2024, especially if it can break through in AI or surprise investors with another round of strong margin expansion.
