Assessing Amazon: A Strong Performer in a Changing Market

As fall approaches, many people focus on shopping and family gatherings. However, it’s also a prime time for investors to review their portfolios. With companies set to announce their strategies and financial goals for the upcoming year, evaluating which stocks to buy, hold, or sell is crucial.

Amazon (NASDAQ: AMZN) has been a favorite among investors. Over the past five years, its shares have risen by 118%, exceeding the S&P 500 by 22 percentage points. Given its promising growth potential and valuation, can this trend continue?

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Cloud Computing: A Key Player

When considering Amazon, many may overlook its cloud computing division, Amazon Web Services (AWS). Yet, this segment is critical for Amazon’s growth in both revenue and profits.

AWS operates massive data centers to help businesses make informed decisions using data. This rapidly expanding sector sees AWS holding the highest market share at about 31%, compared to Microsoft‘s Azure and Alphabet‘s Google Cloud, which represent 25% and 11% respectively. To stay ahead, Amazon continues to invest in technologies like machine learning and artificial intelligence.

Recently, AWS reported second-quarter sales of $26.3 billion, an impressive increase of 18.7%. Despite accounting for only 18% of Amazon’s overall sales, AWS generated 64% of the company’s operating income, boasting a 35.5% operating margin—far exceeding Amazon’s North American and international segments.

Sales Growth Across Sectors

In addition to AWS, Amazon’s other divisions are thriving. Sales from online retail, subscription services, and advertising are contributing significantly to overall growth.

North American sales increased by 9% to reach $90 billion, while operating profit surged nearly 58% to $5.1 billion. International sales also grew, climbing 7% to $31.7 billion. Notably, the international segment turned a profit of $273 million, reversing last year’s loss of $895 million.

Advertising has been a standout, consistently showing at least 20% growth for multiple quarters. In the second quarter, advertising revenue rose 20% to $12.7 billion, making Amazon an attractive platform for advertisers due to its large user base and data-driven targeting capabilities.

Looking ahead, Amazon’s management projects third-quarter sales between $154 billion and $158.5 billion, which reflects an 8% to 11% year-over-year growth. They forecast operating income between $11.5 billion and $15 billion, indicating a potential 3% to 34% rise compared to last year’s $11.2 billion.

Investment Outlook for Amazon

Over the last year, Amazon’s stock has appreciated 44.6%, outperforming the S&P 500’s 34.4%. Once criticized for prioritizing growth over profits, Amazon has now established itself as a highly profitable giant. Investor sentiment remains strong regarding the company’s future prospects.

Many investors anticipate continued strong performance from Amazon shares based on its current valuation. With a price-to-earnings (P/E) ratio of 45, versus 30 for the S&P 500, there is limited margin for error. Still, its highly lucrative AWS sector appears ready to capitalize on significant market opportunities, along with the continued strength of its shopping platform.

In light of all these factors, despite its higher valuation, acquiring shares at this juncture seems advisable.

Opportunity Awaits: Don’t Miss Your Chance

Have you ever thought you missed your opportunity to invest in winning stocks? If that sounds familiar, you’re not alone.

Occasionally, our team of expert analysts identifies a “Double Down” stock—companies poised for significant growth. If you’re worried about having missed your chance with top investments, now may be the ideal time to act before it’s too late. The performance speaks volumes:

• Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $21,285!*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $44,456!*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $411,959!*

At this moment, we’re sharing “Double Down” alerts for three exceptional companies, and this may be a fleeting chance.

See 3 “Double Down” stocks »

*Stock Advisor returns as of October 14, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is on The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is also a member of The Motley Fool’s board. Lawrence Rothman, CFA has no stake in any of the mentioned stocks. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool has recommended options on Microsoft as well. For further details, please refer to their disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.