Amazon's (AMZN 0.58%) stock price is up by about 60% over the last year, more than twice the total returns of the S&P 500 index. The e-commerce leader experienced slowing growth as high inflation and rising interest rates hit consumers' wallets and sent its shares tumbling with the broader market in 2022. But the stock's outperformance coming out of that sell-off could be an omen for what's to come.
Here's what has been driving Amazon's stock higher and why it might have more room to run.
1. Amazon's investments in same-day delivery are paying off
Amazon stock returned 675% over the last 10 years, three times the total returns of the S&P 500. The stock's rise was driven by an annualized increase in total revenue of 24% -- enough to nearly double the company's revenue every three years. Strong top-line growth has been the key driver of Amazon's stock returns, so it's no surprise that the stock tanked in 2022 when that growth slowed due to pressure on consumer discretionary spending.
However, recent efforts by management to expand same-day delivery to more cities are starting to pay off. Amazon launched same-day delivery in 2015 and has put a lot of investment behind this initiative. The service is now available in more than 90 cities.
The thinking behind this strategy is that faster delivery speed translates to more frequent shopping and higher revenue. Sure enough, Amazon's revenue from online stores improved in each of the first three quarters of 2023, with Q3 revenue from online stores up 6% year over year, a slight acceleration compared to the previous quarters.
Amazon's online stores -- the largest contributors to its top line -- raked in $57 billion of revenue last quarter. The company's fast-growing cloud services and advertising business has gotten the most attention in recent years, but faster deliveries have the e-commerce business headed in a positive direction, and that has the market bullish on the stock's prospects for 2024.
Image source: Amazon.
2. Amazon's cost reductions are boosting profits
On top of improving top-line growth, Amazon has experienced a complete turnaround on the bottom line, with operating income in Q3 increasing 343% over the year-ago quarter to surpass $11 billion.
Amazon's push into same-day delivery required large upfront expenditures, which almost wiped out the company's operating profits in 2022. But management is clearly making decisions that will maximize Amazon's stock value for long-term investors, not what will make the most money in the short term.
Those investments in fulfillment operations are now leading to shorter travel distances and fewer touchpoints in fulfilling orders. This has contributed to lower operating costs, higher operating profits, and a higher stock price.
AMZN Operating Income (Quarterly) data by YCharts.
3. Amazon's stock offers significant upside
Amazon's cash flow, or cash from operations, is improving right along with its operating income, and could help push the stock higher in 2024 and beyond. While the operating income metric can sometimes be manipulated by accounting maneuvers, cash from operations shows the actual amount of cash generated by the business, and can provide investors with a useful perspective on Amazon's value.
Over the last four quarters, Amazon generated a whopping $71 billion in cash from operations, or $6.89 per share.
Wall Street analysts expect Amazon to report cash from operations of $8.61 per share for 2023, and $13.37 per share by 2025. That would be a large increase, but one that would be consistent with the financial improvements the company has made over the last year as management has boosted operating efficiency and delivery speed.
Amazon's current stock price is around $155, and it trades at a valuation of 22.5 times cash from operations on a trailing-12-month basis through 2023's third quarter. That is toward the low end of the stock's 10-year trading range by that metric.
AMZN Price-to-Cash-From-Operations Per Share (TTM) data by YCharts.
Applying a price-to-cash-from-operations multiple of 22.5 to its 2025 estimates would put the share price at $294, or 91% higher than the current price. That would be an attractive return for an investment in the cloud and e-commerce leader.
It's uncertain if Amazon's valuation will return to the higher levels it frequently carried before the pandemic, when the company was growing revenue faster than it is now. But all Amazon needs to do is continue showing solid improvement in operating margin and cash flow. Amazon has several ways to accomplish this beyond increasing its delivery speed and optimizing its inventories. It still has a long runway of growth for its high-margin cloud services business.
Either way, the stock offers significant upside potential over the next few years.
