Source: PaxForex Premium Analytics Portal, Fundamental Insight
It's possible that you overlooked it, but Amazon shares made a significant move, quietly gaining 81% in 2023.
While the spotlight of the market was on Nvidia and other AI stocks due to the excitement surrounding ChatGPT and other generative AI applications, Amazon enjoyed one of its most successful years to date. The tech behemoth added approximately $700 billion in market value, staging a remarkable recovery from the 2022 bear market that halved its stock price.
Let's delve into the key factors that propelled Amazon's stock higher last year before delving into the company's outlook for 2024.
Firstly, it's crucial to acknowledge that Amazon's impressive gains were part of a broader trend. The entire tech sector experienced a surge last year, driven by attractive valuations at the start of the year and the anticipation of a new AI revolution, particularly in generative AI technology.
The Nasdaq Composite closed the year with a remarkable 43% gain, while the Nasdaq 100 surged 54% higher. The chart below illustrates the performance of the "Magnificent Seven," referring to the seven most valuable tech stocks in the market.
Surprisingly, despite Amazon's stock nearly doubling last year, it positioned itself right in the middle of the "Magnificent Seven." Thanks to the recovery from the 2022 crash and the enthusiasm surrounding generative AI, nearly every major tech stock experienced significant gains in the past year.
Strategically, Amazon made significant moves in 2023 under the leadership of CEO Andy Jassy, who prioritized sharpening the company's focus on profitability. A pivotal decision was the implementation of cost-cutting measures, including the largest layoff in its history, affecting approximately 27,000 corporate employees. Additionally, Amazon discontinued experimental ventures such as its Scout home delivery robot and Amazon Care healthcare service. Notably, the company closed several cashierless Amazon Go stores, tempering expectations for its once-promising "Just Walk Out" technology.
These strategic shifts, coupled with sustained growth in high-margin segments like the third-party marketplace, advertising, and Amazon Web Services (AWS) cloud infrastructure, led to a remarkable surge in the company's operating margin throughout 2023. The fulfillment capacity established during the pandemic further contributed to Amazon's positive financial trajectory.
In the third quarter alone, operating income skyrocketed from $2.5 billion in the previous year to an impressive $11.2 billion, with each of Amazon's three business segments displaying substantial improvements. Over the first three quarters of 2023, the cumulative operating income reached $23.7 billion, a significant leap from the $11.2 billion recorded in 2022.
Looking ahead, Jassy appears well-positioned to continue driving Amazon's profitability higher, leveraging the company's previous investments. This includes exploring avenues such as incorporating advertisements into Prime Video as part of the ongoing strategic initiatives.
Despite the surge in profits during 2023, Amazon's valuation has not expanded as one might anticipate. The company maintains a relatively high price-to-earnings ratio of 75, reflecting its premium valuation by conventional metrics. However, this valuation appears justified, especially considering Amazon's potential to further expand its margins, particularly as revenue gradually shifts towards higher-margin segments.
An additional growth opportunity for Amazon lies in artificial intelligence (AI). In the previous year, the company introduced its Bedrock AI hosting service for foundational models and established a partnership with Anthropic AI. With an investment of up to $4 billion in Anthropic AI, the creator of the AI chatbot Claude (a competitor to ChatGPT), Amazon is positioning itself in the evolving landscape of AI.
While a breakthrough in AI is not a necessity for Amazon's stock to climb higher, it would certainly be a significant advantage. Even without such a breakthrough, Amazon possesses substantial competitive advantages rooted in its e-commerce business and Amazon Web Services (AWS), enabling continued growth without leading in AI.
While a repeat of the 81% surge in 2024 may be unlikely, Amazon could still see more gains on the horizon. The company appears poised to drive its margins to new heights, leveraging its wide economic moat. This suggests that Amazon has ample room to propel profits higher, potentially driving its stock price upward in the process.
As long as the price is above 145.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 144.96
- Take Profit 1: 150.00
- Take Profit 2: 160.00
Alternative scenario:
If the level of 130.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 130.00
- Take Profit 1: 123.00
- Take Profit 2: 115.00
