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The economy has so far turned out better than many feared in 2023, giving a significant lift to technology stocks, including Amazon (AMZN). In addition, the rapid advancement of Generative AI (Artificial Intelligence) and the deep cost-cutting measures taken by many tech giants has further helped to boost share prices.
Thanks to this favorable operating environment, Amazon stock is trending higher. Shares of this omnichannel retail and cloud services provider have climbed over 66% year-to-date, easily outperforming the S&P 500 Index ($SPX).
This outperformance includes a more than 10% pop in AMZN following its impressive second-quarter earnings announcement last week. Notably, the company delivered earnings of $0.65 a share in Q2, crushing Wall Street’s expectations of $0.34.
While Amazon’s stock price has appreciated quite a bit already, the company is arguably a long-term winner. Moreover, there are multiple catalysts - including the reacceleration in its businesses, AI opportunity, and a focus on improving profitability - supporting the bullish outlook.
Against this background, let’s examine the factors that make Amazon stock one to buy at current levels.
AWS to Support Growth
Amazon’s cloud computing platform, Amazon Web Services (AWS), is its key growth catalyst and a significant contributor to profitability. Macro headwinds weighed on enterprise spending over the past several quarters and, in turn, took a toll on the segment’s performance.
Nonetheless, AWS retains its leadership position in the cloud infrastructure space, and the segment's revenue growth rate stabilized during the second quarter as customers shifted back to new workload deployment. Furthermore, the ongoing digital transformation and an improvement in the macro environment will likely reaccelerate the segment’s growth.
In addition, with its broad array of storage, analytics, database, and data management services, AWS is poised to be customers' long-term partner in generative AI - an area where Amazon says it's investing heavily to drive future growth opportunities.
Advertising Segment Gains Scale
The momentum in Amazon’s advertising revenue has continued despite a challenging macro environment. Specifically, revenues for the division increased to $10.7 billion in the second quarter, up from last year's $8.8 billion.
The growing scale of the segment is led by its performance-based advertising offerings. Amazon is also leveraging machine learning to help advertisers reach highly relevant audiences with optimal cost efficiency. Plus, the mega-retailer has partnered with Pinterest (PINS) to display ads on its website that will direct customers to find and buy relevant products on Amazon, in turn offering more value to the brands and advertisers.
With a growth rate of 20% or more in each of the past six quarters, the advertising segment is expanding impressively, and emerging as a solid driver of growth for the company.
Cost Cuts Bode Well for Bottom-Line Growth
The momentum in its high-margin businesses (AWS and advertising) should help to support Amazon's bottom line. Meanwhile, its focus on reducing costs should enable the company to deliver profit growth that's sustainable in the long term.
Among these efforts, Amazon is moving its stores’ fulfillment and transportation network from one national hub into eight separate regions serving smaller geographic areas. The transition will reduce the time and expense to deliver products to customers.
During the Q2 conference call, Amazon CEO Andrew Jassy said, “Regionalization is working and has delivered a 20% reduction in the number of touches for our delivered package, a 19% reduction in miles traveled to deliver packages to customers and more than 1,000 basis point increase in deliveries fulfilled within the region.”
The ongoing improvements in fulfillment costs, plus the development and expansion of same-day fulfillment facilities, should help to drive Amazon's operating and financial performance, as well as the rally in its share price.
Bottom Line
Most of the analysts covering Amazon stock remain optimistic about its prospects. Out of the 39 analysts covering AMZN, 34 have a “Strong Buy” recommendation, four analysts recommend a “Moderate Buy,” and one maintains a “Hold” rating.
That said, the average price target for AMZN is $146.22, implying expected upside of only about 5% from current levels.
Overall, Amazon stock has already appreciated significantly in value in 2023. However, the positive momentum in its advertising business, stabilization in the AWS segment, and continued focus on cost-cutting all support my bullish outlook on the stock - making this an outperforming name to buy at current levels.
On the date of publication, Sneha Nahata 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.
