What’s Driving AMZN Stock Higher?

Over the last year, Amazon stock (NASDAQ: AMZN) has appreciated 16%, closely mirroring the NASDAQ’s 14% increase. This year has been rather tumultuous for Amazon stock. After reaching peaks above $240 in January, the stock decreased by over 30% to just below $170 by April. This drop was mainly influenced by President Trump’s vigorous trade policies. Yet, as trade tensions subdued, the stock rebounded 30% from its lowest point.

When examining a slightly extended timeframe, AMZN stock has surged 43% since the start of 2024. This notable growth can largely be credited to three major factors:

• a 30% increase in the company’s price-to-sales (P/S) ratio, rising from 2.8 in 2023 to 3.6 at present; and
• a 13% jump in revenue, increasing from $575 billion to $650 billion; slightly mitigated by:
• a modest 2% rise in total shares outstanding to 10.8 billion.

We’ll explore these factors in greater detail. Our dashboard on Why Amazon Stock Moved contains more information. While AMZN stock has seen impressive gains, if you desire growth with a less volatile experience than that of a single stock, consider the High-Quality portfolio, which has surpassed the S&P, achieving >91% returns since inception. Additionally, check out – QBTS Stock: What’s Next For D-Wave After 1,350% Rally?

What’s Behind The Revenue Growth?

Amazon’s revenue growth of 13% since 2023 arises from robust long-term trends in e-commerce, streaming, and digital advertising. While sales in North America climbed by 10% and international sales rose by 9% last year, Amazon Web Services (AWS) served as the main growth driver, soaring by 19%. This underscores the effectiveness of Amazon’s strategic diversification, with AWS emerging as an exceptionally valuable segment.

Looking forward, AWS will remain vital for Amazon’s expansion, although the company faces growing competition in cloud computing from Microsoft Azure and Google Cloud. Microsoft’s strong collaboration with OpenAI and substantial investments in AI, combined with Google’s rapid growth in generative AI cloud services, present significant obstacles. To preserve its market leadership in this dynamic tech environment, Amazon must continue to innovate. Like its rivals, Amazon is allocating tens of billions to AI-related capital projects.

What’s Driving The Valuation Higher For AMZN Stock?

AWS has significantly enhanced Amazon’s financial outcomes, primarily by increasing its overall profitability. Since 2023, Amazon’s operating margin has expanded dramatically by 72%, increasing from 6.4% to 11.0%. This improved profitability, alongside strong sales growth and AWS’s strategic development, has favorably altered investor perception. As a result, the company’s price-to-sales (P/S) valuation multiple has grown by 30%, from 2.8x trailing revenues in 2023 to the current 3.6x.

But What Next? Is AMZN Stock A Buy At $220?

At its current trading price of $217, Amazon’s stock is priced at a price-to-sales (P/S) ratio of 3.6x, which is closely aligned with its five-year average of 3.2x. Nevertheless, there are strong reasons to anticipate that the valuation multiple could increase further.

Amazon’s strategic investments in AI are expected to drive significant expansion across its various business segments. Within AWS, heightened demand from businesses developing and utilizing AI applications is projected to directly benefit cloud infrastructure sales. Concurrently, AI is set to improve Amazon’s retail functions through enhanced product recommendations, search, and personalized shopping experiences. These developments could result in higher conversion rates, increased average order values, and more effective ad targeting both on its platform and within the broader digital advertising ecosystem.

As a result, Amazon anticipates low double-digit sales growth over the next three years, with even more notable increases in bottom-line growth expected. This enhanced profitability, in conjunction with ongoing AWS expansion and Amazon’s continued dominance in the e-commerce sector, supports a strong case for a higher valuation multiple. Investors are likely to view these strategic AI initiatives as essential catalysts for future growth and value generation.

But Account For Risks

Amazon stock is not without its risks. During the inflation-driven market downturn in 2022, AMZN fell 52%, dropping from a January peak of $170.40 to $81.82 by December. This decline far exceeded the S&P 500’s 25.4% drop. AMZN did not return to its previous high until February 2024, highlighting both its volatility and resilience. Earlier this year, a similar pattern was observed amid trade war anxieties, where the stock dropped 30%, compared to a 19% peak-to-trough decline for the S&P 500.

In addition to broader market and geopolitical challenges, there are company-specific risks associated with Amazon’s substantial capital expenditures. Since 2023, Amazon has poured an astounding $161 billion into CapEx. A critical question remains: what if these considerable investments fail to deliver the anticipated returns?

Indeed, financial risk is just a minor facet of the risk assessment framework we utilize while creating the Trefis High Quality (HQ) Portfolio. This portfolio encompasses 30 stocks and has consistently outperformed the S&P 500 over the past four years. What accounts for this? As a whole, HQ Portfolio stocks have generated superior returns with less risk compared to the benchmark index; offering a smoother ride, as illustrated in HQ Portfolio performance metrics.

While AMZN stock appears poised for further appreciation, it is valuable to assess how Amazon’s Peers perform on key metrics. Additionally, you will find other useful comparisons for companies across different industries at Peer Comparisons.