Amazon’s Growth Potential: AWS Drives Profitability Surge
Amazon (NASDAQ: AMZN) has built a robust business model that generates substantial returns for its shareholders. While most people recognize Amazon for its online marketplace, the company’s operations extend significantly beyond that segment. Continuous innovation and strategic expansion are central to its sustained growth, solidifying its status as one of the most valuable companies globally.
Investors should note the considerable future potential still present in the business. This is particularly highlighted by a specific statistic that reflects the optimism surrounding its prospects for growth.
Cloud Business Propels Amazon’s Profitability
The majority of Amazon’s revenue originates from its online marketplace. However, its cloud division, Amazon Web Services (AWS), stands out when evaluating overall profitability. Below is a breakdown of operating income across its major segments:
| Segment | Operating Income | % of Total |
|---|---|---|
| North America | $5,841 million | 31.7% |
| International | $1,017 million | 5.5% |
| AWS | $11,547 million | 62.7% |
Source: Company filings. Table by author. Figures in millions.
The growth prospects for AWS are particularly encouraging. With increased investment in technology and artificial intelligence, there is a heightened demand for cloud services and improved infrastructure.
Over the last five quarters, AWS revenue increased by 21%, reaching $29.3 billion. Even more impressive, its operating income surged by 61% during the same period. Improving margins for AWS suggest additional growth could be on the horizon, especially as the company invests in AI technology.
Valuation Metrics Indicate Potential Bargains
Historically, Amazon’s stock has commanded a premium due to its long-term growth potential. The chart below illustrates how discounted the current valuation is compared to its price-to-earnings (P/E) multiple.
AMZN PE Ratio data by YCharts
Although its P/E ratio was impacted by a challenging year in 2022, it is not unusual to see Amazon’s stock trading at rates exceeding 60 or 70 times its trailing earnings.
A Strong Buy Opportunity
Despite Amazon’s significant market cap of $2.2 trillion, there remains substantial upside as AWS continues to grow. Currently, buying Amazon stock at a P/E ratio below 35 appears to be a value opportunity, given the robust performance and potential growth of AWS.
As of now, Amazon shares have decreased by over 5% year-to-date, which may reflect broader economic concerns rather than issues within Amazon’s business model. The company generated nearly $21 billion in free cash flow over the past 12 months.
With its diverse operations, strong margins, and numerous growth opportunities, Amazon presents a compelling option for long-term investors.
Conclusion on Investment Potential
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
