Amazon (NASDAQ:AMZN) stock has had a great run and the company entrenched itself in every part of our life. From how we shop to the devices in our homes.
At its current price level, it’s still around 17% below its all-time highs in 2021. In 2023, the stock has seen an amazing rebound. In 2024, it raises questions about whether Amazon stock can continue its stellar performance.
Advertising and AMZN Stock
From the old days of cable TV ads, the future of advertising is on Amazon. It reaches over 400 million visitors a year and can show ads on many platforms from its marketplace to its Kindle. It also has more data on consumers than any other platform, from your shopping search history to the Echo devices you have at home.
As such, it is the fastest growing segment for Amazon, increasing by over 22% YoY, bringing the total to over $45 billion this year in revenue. In addition, it’s a high-margin business that sees more profitability than even AWS, rumored to have around a 50% profit margin.
What’s going to be a significant driver this year for advertising is the incorporation of it into Prime Video. With advertisers knowing the specific preferences of Prime consumers, Amazon’s advertising becomes vastly more attractive.
AWS Could Outperform
A big reason AMZN stock struggled was a decrease in AWS growth, which many blamed on competitors such as Microsoft.
However, growth rates for AWS could likely bounce back again because of industry tailwinds that have nothing to do with the competition.
In 2021, AWS saw its highest YoY growth at 37%. In 2022, it fell to 29%. And in 2023 fell to a staggering 15%. Though Microsoft is a fierce competitor, a greater cause of the decline was the expectations of a recession. Which didn’t happen.
With the explosive growth of generative AI, companies will need to continue investing in the cloud. Even though they avoided switching last year because of macroeconomic concerns, 2024 is already looking much brighter.
AMZN Stock Valuation
For me, I believe that most of the positives of AMZN stock have already been priced in. Despite Amazon being a high-quality company, its share price is very risky given so much uncertainty around the stock.
It’s important to consider valuation as well, no matter what you think of the company. If you had bought AMAN stock in the middle of 2020, you would still be at a slight loss almost 4 years later and saw almost a 50% loss in your position at the end of 2022.
As reiterated by Warren Buffet, one luxury investors enjoy in the stock market is that you don’t always have to invest. With Amazon, many other companies are of similar quality but trade at lower valuations to give you more protection.
The stock is currently trading at an 84.4x P/E and 2.78 PEG ratio, sales have barely budged 10% in a year where inflation itself was 6.5%. The Forward P/E ratio looks better at roughly 46x, but that’s only assuming Amazon performs in line with expectations.
FTC Antitrust
Currently, Amazon is facing antitrust lawsuits in both the US and the European Union. Contrary to public belief, it’s not just the fact that Amazon will see a negative impact if it loses. Instead, the lawsuit itself means Amazon has to make changes that will hurt profitability.
For one thing, sellers used to have to use Amazon’s fulfillment systems to qualify for Prime delivery. Recently, Amazon secretly added an option for sellers to qualify for Prime even if they don’t use Amazon FBA (fulfillment by Amazon).
Conclusion
Amazon is a business with many different segments, each with its opportunities and potential to fail. To me, Amazon simply isn’t the bargain it once was during 2023. The business has some good things going for it, but slowing sales and high valuation could mean that there’s little room for the stock price to grow.
On the date of publication, Michael Que did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
The researchers contributing to this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
