With a market capitalization of $1.95 trillion, Amazon.com, Inc. (AMZN), the e-commerce giant is riding on the solid momentum in its cloud computing arm, Amazon Web Services (AWS). In the battle for dominance in Artificial Intelligence (AI), the company’s cloud segment is competing with tech titans like Microsoft Corporation (MSFT) and Alphabet Inc. (GOOGL).
AWS, which rents cloud-based computing power and other services to businesses, is a crucial profit driver for AMZN. In 2023, AWS contributed two-thirds of the company's $37 billion in operating income while accounting for 16% of the company's total revenue.
As these hyperscalers compete for AI-related business, they also strive to reignite sales growth after companies adjust their IT spending strategies in 2022 and beyond. Although AWS revenue grew 17% year-over-year for the quarter, Microsoft Azure sales surged by 31%, and Google Cloud sales increased by 28%.
Despite this, Amazon's growth stems from a larger overall base of sales, with $25 billion in revenue compared to $9.60 billion for Google and an estimated $18.80 billion for Microsoft Azure.
During the first-quarter earnings call, AMZN’s CEO, Andy Jassy, stated that AWS had reached a $100 billion annual revenue run rate, including a ‘multibillion-dollar’ revenue run rate related to AI. In a strategic move to reinforce its position in the competitive AI landscape, the tech and cloud giant announced an additional investment of $2.75 billion in the AI startup Anthropic in March.
This completed a $4 billion deal with the AI startup initiated late last year. Anthropic is renowned as the developer of the chatbot Claude, which competes with OpenAI's ChatGPT, a pivotal player in the generative AI realm since late 2022. This strategic move underscores a spending blitz among cloud providers to stay ahead in the AI race.
Moreover, AWS' expanding client base benefits from its strengthened generative AI capabilities, exemplified by its recent partnership with SAP. As a result, AWS became the first cloud provider certified to support SAP's portfolio. This extended collaboration enhances AWS's clientele and underscores the partnership's strength.
Shares of AMZN have surged 35.7% over the past nine months and 54.3% over the past year to close its last trading session at $187.06.
Let’s look at factors that could influence AMZN’s performance in the upcoming months.
Growing Client Base
AWS is strengthening its position in the cloud computing landscape through innovative partnerships and advanced AI solutions. With a focus on generative AI and a robust suite of cloud offerings, AWS is attracting an increasing number of clients.
In May 2024, NinjaTech AI partnered with AWS to launch Ninja, an AI agent powered by AWS Trainium and Inferentia2 chips, highlighting AWS' dedication to AI innovation. CrowdStrike also extended its alliance with AWS to enhance cloud security and AI advancements using Amazon Bedrock and SageMaker.
Brightcove's adoption of Amazon's generative AI assistant, Amazon Q Business, for practical applications in the enterprise and media sectors showcases the versatility of AWS's offerings. Furthermore, BlackBerry unveiled Cylance Assistant on April 30, a generative AI-driven cybersecurity advisor powered by Amazon Bedrock, highlighting the synergy between AWS's AI capabilities and cybersecurity solutions.
With an expanding client base and strategic alliances, AWS is well-positioned for continued growth. In the first quarter of 2024, AWS contributed nearly 18% of Amazon's total sales, which is impressive.
Robust Financials
In the first quarter that ended March 31, 2024, AMZN’s net sales increased 12.5% year-over-year to $143.31 billion. AWS segment sales stood at $25.04 billion, up 17.2% year-over-year. Its operating income improved by 220.6% from the year-ago value to $15.31 billion. The company’s net income of $10.43 billion or $0.98 per share indicates robust growths of 228.8% and 216.1% from the prior year’s period, respectively.
AMZN’s trailing twelve months operating cash flow surged by 82% year-over-year to $99.15 billion, up from $54.3 billion in the same period ending March 31, 2023. Its free cash flow also saw a significant turnaround in the same period, with an inflow of $50.15 billion, compared to an outflow of $3.32 billion in the prior year’s period.
Solid Historical Growth
AMZN’s revenue and EBITDA have grown at respective CAGRs of 12.1% and 20.5% over the past three years. The company’s EBIT has increased 19.5% over the same timeframe, while its net income and EPS have improved at CAGRs of 11.9% and 10.7%, respectively.
Also, the company’s tangible book value and total assets have grown at CAGRs of 30.1% and 23.9%, respectively, over the past three years.
Favorable Analyst Estimates
The consensus revenue estimate of $148.60 billion for the fiscal second quarter (ending June 2024) represents a 10.6% increase year-over-year. The consensus EPS estimate of $1.01 for the current quarter indicates a 56.1% improvement year-over-year. The company has an excellent surprise history, surpassing the consensus revenue estimates in each of the trailing four quarters.
Additionally, AMZN’s revenue and EPS for the current year (ending December 2024) are expected to grow 11.1% and 56.5% year-over-year to $638.67 billion and $4.54, respectively.
High Profitability
AMZN’s trailing-12-month gross profit, EBITDA, and net income margins of 47.59%, 16.35%, and 6.38% are 29.3%, 46.3%, and 35.6% higher than the industry averages of 36.80%, 11.18%, and 4.70%, respectively. Similarly, its trailing-12-month 9.69% levered FCF margin is 77.5% higher than the industry average of 5.46%.
Furthermore, the stock’s trailing-12-month ROCE and ROTA of 20.30% and 7.10% favorably compare to the industry averages of 11.41% and 4.24%, respectively.
POWR Ratings Reflect Promise
AMZN’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. AMZN's B grade for Momentum is justified by its share price trading above its 50-day moving average of $182.53 and 200-day moving average of $158.05.
The stock also has a B grade for Sentiment and Quality, which is in sync with its optimistic analyst estimates and higher-than-industry profitability.
AMZN is ranked #6 out of 51 stocks in the B-rated Internet industry.
Beyond what I have stated above, we have also given AMZN grades for Growth, Value, and Stability. Get access to all AMZN ratings here.
Bottom Line
The competition for dominance among Google Cloud Platform (GCP), AWS, and Microsoft Azure has shifted from the cloud to generative AI (GenAI). These tech giants are now racing to develop new Large Language Models (LLM) for a wide range of uses and devices, marking a pivotal shift in their competitive landscape.
According to Gartner, by 2027, over half of the generative AI models utilized by enterprises will be tailored to a specific industry or business function, a significant increase from the approximately 1% observed in 2023.
Additionally, the global generative AI market is projected to reach $191.80 billion by 2032, growing at a CAGR of 34.1% between 2023 and 2032. AWS' expanding efforts in generative AI are poised to position AMZN favorably to capitalize on this market's immense growth prospects.
Given AMZN’s solid financials, accelerating profitability, and promising growth outlook, this stock could be an ideal buy now.
How Does Amazon.com, Inc. (AMZN) Stack Up Against Its Peers?
While AMZN has an overall POWR Rating of B, investors could also check out these other stocks within the B-rated Internet industry with A (Strong Buy) ratings: Yelp Inc. (YELP), Dingdong (Cayman) Limited (DDL), and Travelzoo (TZOO). For exploring more A and B-rated Internet stocks, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
AMZN shares were trading at $184.87 per share on Tuesday afternoon, down $2.19 (-1.17%). Year-to-date, AMZN has gained 21.67%, versus a 12.72% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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