Amazon (NASDAQ:AMZN) has created massive wealth for long-term investors. Shares of the big tech company have surged a staggering 5,200% in the past two decades. Despite its market-thumping gains, AMZN stock is down 23% from all-time highs due to economic headwinds. But as inflation is brought under control, there is a chance for interest rates to move lower as well, acting as a tailwind for Amazon. For AMZN to regain its all-time highs, it will have to gain 30%, which isn’t out of reach.
I am extremely bullish on Amazon stock due to its leadership position in several growth markets, its widening bottom line, and its reasonable valuation.
How Did Amazon Perform in Q3 2023?
Amazon is a well-diversified tech company. It is the largest e-commerce platform in the world and a major player in segments such as public cloud, online streaming, and digital advertising. In Q3 2023, Amazon reported revenue of $143.1 billion and adjusted earnings of $9.9 billion or $0.94 per share. Comparatively, Wall Street forecast revenue of $141.6 billion and earnings of $0.58 per share.
While sales were up 13%, its adjusted earnings more than tripled from $0.28 per share in the year-ago period.
In the last three decades, Amazon has often sacrificed its profit margin for top-line growth. But as its sales growth decelerates due to a combination of its massive size and a challenging macro environment, it has focused on improving profit margins.
Amazon’s cost savings efforts in Q3 allowed it to report record operating profits in the September quarter. Its operating margin of 7.8% was, however, still lower than the margin of 8.2% in Q1 2021.
Amazon’s Profit Margins Should Continue to Improve
In the last few years, Amazon invested heavily to improve supply chain efficiencies and support demand for Amazon Web Services. Back in 2019, Amazon disclosed that it would reduce the shipping time for Prime customers to just one day, which meant it had to expand its fulfillment network capacity aggressively.
Soon after, the COVID-19 pandemic forced enterprises globally to create a remote work environment, increasing demand for Amazon Web Services. Amazon’s capital expenditures rose from $13.4 billion in 2018 to $63 billion in 2022. In the last three quarters, its capital expenditures have narrowed to $38.1 billion as the company aims to widen its profit margins.
Moreover, in the last 15 months, Amazon reduced its employee headcount, regionalized fulfillment center operations, and optimized its cost base.
Amazon Leads Multiple Growth Markets
Amazon is the undisputed leader in the e-commerce segment, and the ongoing holiday season will be a key driver of sales in Q4 of 2023. The tech giant also leads the public cloud infrastructure market with Amazon Web Services. This segment increased sales by 12% in Q3 and is Amazon’s most profitable business, with an operating margin of 30%.
Amazon also operates the third largest digital advertising platform globally behind Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG) and Meta Platforms (NASDAQ:META). More than four billion potential customers visited amazon.com last month, and the high purchase intent of these visitors is moving enterprise ad budgets away from Meta and Alphabet.
Amazon’s Advertising revenue in Q3 surged by 26% to $12.1 billion, outpacing its other big tech peers in the process.
Is AMZN Stock a Buy, According to Analysts?
Amazon is forecast to boost its bottom line from a loss of $0.27 per share in 2022 to adjusted earnings of $3.44 per share in 2024. So, priced at 42.6x forward earnings, I believe AMZN stock is not too expensive, given its growth forecasts. Each of the 41 analysts covering AMZN stock recommends a Buy, giving it a Strong Buy consensus rating. The average AMZN stock price target is $175.51, which is 19.6% above current prices.
The Bottom Line
It’s possible for Amazon to gain 30% in 2024, especially if market sentiment improves. The tech stock has already surged 71% year-to-date and is among the top performers on the S&P 500. Its leadership position, stellar growth rates, and widening margins make it a compelling bet, even at a trillion-dollar valuation.
