Amazon (AMZN) stock is down over 10% since it reported its second quarter (Q2) financials on Aug. 1. The dip primarily reflects the e-commerce and cloud computing giant’s lower-than-expected revenues for the quarter, and a third-quarter sales forecast that fell short of Wall Street’s projections.
During the second quarter, Amazon’s net sales increased about 10% to $148 billion. However, it fell slightly below analysts’ estimate of $148.56 billion. Moreover, the midpoint of Amazon’s Q3 sales guidance range of $154 billion to $158.5 billion was below the consensus forecast of $158.2 billion, as macroeconomic challenges continue to affect consumer spending and its growth.
Despite these setbacks, there are positive indicators for Amazon stock. The reacceleration in the Amazon Web Services (AWS) segment, strong growth in its advertising business, and management’s positive commentary around the e-commerce vertical provide a solid foundation for continued growth.
Given these dynamics, let’s explore why Amazon stock could deliver solid returns in 2024 and beyond.
3 Reasons Why Amazon Stock is a Buy
1. Amazon’s AWS: A Powerhouse of Growth — Amazon’s AWS segment, its cloud computing platform, continues to deliver impressive growth. In Q2, the AWS segment reported revenue of $26.3 billion, marking an 18.8% year-over-year increase. This reflects acceleration from the 17.2% growth seen in Q1. Further, with an annualized revenue run rate surpassing $105 billion, AWS remains a key driver of Amazon’s financials and share price.
During Q2, Amazon’s leadership highlighted that AWS experienced solid growth across generative artificial intelligence (AI) and non-generative AI workloads. Moreover, enterprises are increasingly shifting to cloud-based solutions and migrating from on-premises infrastructure. This transition provides a solid growth opportunity for AWS, given its broad functionality, enhanced security features, and extensive partner ecosystem.
It’s worth noting that organizations of all sizes are leveraging AI to drive their operations. Despite being in the early stages, AWS's AI services are already generating billions in revenue. AWS has strengthened its AI capabilities through its partnership with Nvidia (NVDA). Plus, AWS has developed its own custom silicon: Trainium for training and Inferentia for inference to offer better prices. These chips are witnessing solid demand. The second version of its custom chips, especially Trainium, is set to be released later this year, promising significant improvements in price, which will drive further growth.
Over the past 18 months, AWS has launched more machine learning and generative AI features than all other major cloud providers combined. This relentless pace of innovation ensures AWS remains at the forefront of the cloud computing and AI landscape.
As the AWS segment’s revenue reaccelerates, the company focuses on driving efficiencies across the business. This will enable Amazon to invest in growth initiatives, including generative AI.
2. Advertising: Amazon’s Rapidly Growing Business — Amazon's advertising business is growing rapidly, with revenues increasing by 20% or more. Thanks to this momentum, advertising services are boosting Amazon’s overall financial performance. The segment also remains a key contributor to profitability in North American and international markets.
In Q2, Amazon's advertising revenue surged by over $2 billion year-over-year. Its advertising business has generated over $50 billion in sales in the trailing 12 months. The majority of this revenue comes from sponsored ads, an area where the company sees substantial growth opportunities in the future. In particular, opportunities in Prime Video ads provide a significant runway for future growth.
Amazon's unique value proposition lies in its ability to deliver business outcomes such as product sales or subscription sign-ups. Amazon's advanced measurement and ad tech capabilities help improve the relevance and performance of ads, driving demand for its services.
In summary, Amazon’s advertising division will likely maintain its momentum and deliver solid growth in the coming years.
3. E-commerce Segment’s Resilient Growth — Despite macroeconomic headwinds affecting consumer spending, Amazon’s e-commerce business has remained resilient and generated steady growth over the past several quarters. The company’s focus on expanding product selection, maintaining competitive pricing, and enhancing delivery speed has resonated well with customers, driving the segment’s growth in its customer base.
Amazon has significantly improved its delivery speed for its Prime members, with over 5 billion units arriving either the same day or the next day. This enhanced delivery speed has bolstered customer loyalty, prompting them to increasingly shop at Amazon.
Moreover, Amazon remains committed to optimizing its operational efficiency by strategically positioning inventory closer to its customer base. This localization strategy has resulted in more consolidated shipments with higher units per box, shorter delivery distances, and enhanced productivity within its transportation network. Further, the ongoing integration of automation and robotics will likely improve its delivery speed and help lower costs.
The Bottom Line on Amazon Stock
While Amazon stock has experienced a recent decline, the company’s strong performance in the AWS segment, rapidly growing advertising business, and resilient e-commerce division present compelling reasons to consider Amazon as a solid investment.
Analysts are bullish about its prospects, with most recommending a “buy.” Out of 45 analysts in coverage, 42 rate it as a “strong buy” and three as a “moderate buy,” resulting in a consensus rating of “strong buy.”
The average price target for AMZN stock is $226.67, suggesting a potential upside of approximately 37.6% from its current levels.
On the date of publication, Amit Singh did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
