Source: PaxForex Premium Analytics Portal, Fundamental Insight
Amazon has achieved remarkable success since its inception in 1994. Back in May 1997, its initial public offering (IPO) price stood at $0.075 (adjusted for subsequent stock splits). Over time, its value surged by an astounding 178,900%, greatly outperforming the S&P 500's approximately 750% total return.
Nonetheless, it's crucial to understand that this historical performance doesn't necessarily guarantee future outcomes. The investing maxim "Past success doesn't guarantee future results" serves as a reminder of this fact.
Therefore, whether you're considering acquiring Amazon stock or you're already a shareholder, it's vital to conduct a thorough assessment of Amazon's future prospects and its current valuation. This analysis will aid in determining whether it's prudent to buy, maintain your current holdings, or consider selling the stock.
While many perceive Amazon primarily as a vast online retailer offering an extensive range of products, its Amazon Web Services (AWS) division has experienced rapid expansion and is responsible for the bulk of the company's profits. This growth is underpinned by the substantial investment required for data centers, creating formidable barriers to entry in this domain.
During the first half of the year, AWS achieved a sales upturn of 14%, reaching $43.5 billion. While this represents a slowdown compared to recent years, including a 29% growth in 2022, AWS still outpaces the growth rates of the North American and International segments. Notably, AWS contributed to 17% of Amazon's first-half sales, while commanding over 84% of operating profits. However, it's worth noting that the unit's income dipped from $12.2 billion to $10.5 billion.
Direct competitors in this field include Microsoft's Azure and Alphabet's Google Cloud. Lately, both Azure and Google Cloud have displayed accelerated growth rates compared to AWS. In the most recent quarter, Azure and other cloud services saw a sales increase of 26%, and Google Cloud achieved a 28% rise in top-line figures. AWS, in comparison, witnessed a second-quarter sales increase of 17%.
Despite maintaining a respectable growth trajectory, AWS has faced some constraints as customers have exercised caution. Although companies will persist in relying on data, and AWS retains a dominant market share in cloud computing, there is an expectation for AWS to regain swifter growth relative to Azure and Google Cloud.
Amazon's influence in the retail landscape is far-reaching, extending from its online sales platform to its physical stores. The company has cultivated a reputation for offering competitive prices, convenient shopping experiences, and swift delivery services.
In the second quarter, the North American and international units displayed a growth of 11% and 10% in sales, reaching $82.5 billion and $29.7 billion, respectively. However, these segments do not yield significant profits. The North American unit garnered merely $3.2 billion in earnings, while the international division incurred a loss of $895 million.
Acknowledging the challenge posed by its rapid expansion, Amazon's management has proactively tackled the issue of profitability by implementing cost-cutting measures. In the most recent period, the growth rate of total operating expenses was slower than that of sales. This strategic approach to expense management is critical, given the company's prior aggressive hiring and expansion endeavors that necessitate careful financial monitoring.
Amazon's stock price has surged by an impressive 58% since the year's commencement, dwarfing the S&P 500's gains, which were a quarter of that magnitude. This robust increase has translated into a heightened valuation, with shares trading at a forward price-to-earnings (P/E) ratio exceeding 61, contrasting the figure of approximately 40 in January.
While this elevated valuation could be justified by Amazon's cost-cutting measures and the potential for profit growth at AWS, it's important to note that the market's optimism is centered on the company's projected rapid expansion. Should these optimistic expectations not materialize, shareholders could face the possibility of a significant decline in stock price.
At present, our recommendation would be to consider selling the shares, while attentively monitoring developments. If there are signs of tangible progress, especially within AWS, and the valuation aligns more closely with reasonable metrics, a potential buying opportunity may present itself in the future. This approach allows for flexibility based on real-world outcomes and a balanced assessment of Amazon's performance and market sentiment.
As long as the price is above 125.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 132.30
- Take Profit 1: 140.00
- Take Profit 2: 150.00
Alternative scenario:
If the level of 125.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 125.00
- Take Profit 1: 120.00
- Take Profit 2: 110.00
