It is valued at nearly $2 trillion already, but Amazon (AMZN 0.41%) sure doesn't seem to be approaching maturity. Wall Street is excited about several of its massive growth initiatives, led by the proliferation of artificial intelligence (AI) throughout its Amazon Web Services (AWS) platform.
Shares have soared in the past year, jumping 80% compared to the 27% rally in the S&P 500. Yet there's room for further growth ahead for this business, which is valued more like a retailer than a tech specialist right now. Let's look at why you might want to pick up a few shares of Amazon while they're priced at less than $200.
The attractive services platform
It's hard to overstate the success that Amazon is having with its cloud services platform. Enterprises are increasingly putting more work onto its system, with demand being lifted by new AI functionality.
AWS expanded at a 13% rate in the most recent quarter to cross $24 billion in revenue. Sure, Microsoft's Azure platform is growing more quickly. But Amazon is fully participating in the booming market for enterprise services and AI.
"[N]ew [AI] capabilities like Bedrock, Q, and Trainium have resonated with customers and are starting to be reflected in our overall results," CEO Andy Jassy said in an early-February press release.
Higher margins
One of the biggest knocks against Amazon's stock is the company's low profit margin. It's a byproduct of the tech titan's e-commerce business, which requires lots of capital to maintain and is situated in the competitive online retail space. Amazon's best operating margin performance in the past decade has only been about 6% of sales, in fact, compared to the 30%-plus rate generated by Meta Platforms and Apple.
AAPL Operating Margin (TTM) data by YCharts
Amazon finally seems ready to break out of that profitability slump. Operating income more than tripled in 2023 to $37 billion. The AWS segment made the biggest contribution to that boost, but it was also powered by Amazon's expanding digital advertising business and several other innovations that are early on in their growth stories.
"[O]ur teams are delivering at a rapid clip, and we have a lot in front of us to be excited about," Jassy said.
The surest path toward continued positive momentum for the stock is through Amazon's profit margin moving toward -- and eventually past -- 10% of sales.
The price is right
Amazon's collection of businesses is unique, making it hard to compare its valuation directly against peers. Yet there's a good chance that Wall Street is undervaluing the company even after the stock's recent rally.
Shares exchange hands for less than 4 times sales, which puts the stock's price closer to Costco's premium of 1.3 times revenue than to Apple's premium of 7 times sales. Amazon's weak profitability means it deserves a lower valuation than pure tech peers like Microsoft and Apple, of course, but it should close that gap as its annual earnings power expands in the coming years.
Investors who'd rather watch the stock for now should follow Amazon's operating income and the pace of growth in the AWS platform for more signs of further improvements. A stumble in either category could push shares lower and produce a more attractive buying opportunity. If you don't mind taking on some risk, meanwhile, consider owning Amazon stock for the long term.
