Amazon (AMZN 1.80%), the world's largest online retailer, has had a stellar start to the year with its stock up 64% in 2023. While much of that performance can be attributed to the company's strong fundamental results, the technology sector broadly has also helped propel Amazon's stock price higher, with the Nasdaq-100 index up 40% this year.
With such impressive performance year to date and Amazon's stock creeping back up to near its all-time highs, investors are likely asking themselves whether or not Amazon can still be a market beater from here. Let's take a look.
Getting back on track
Before trying to assess Amazon's future, it's probably best to revisit the company's past.
Following the surge in e-commerce demand that was brought about by the pandemic, Amazon's management team made the decision to invest in expanding its fulfillment capacity in order to meet the needs of its customers. Between 2020 and 2022, Amazon spent $165 billion on purchases of property and equipment to drastically expand the company's logistics network. Amazon CEO Andy Jassy put this spending into context during last year's fourth-quarter conference call when he said, "we took a fulfillment center footprint that we've built over 25 years and doubled it in just a couple of years."
While this surge in spending helped satisfy customers, it also led to lots of excess capacity, which hindered the company's profitability. Between its North American and international retail segments, Amazon reported $10.5 billion in operating losses last year, one of the big reasons why Amazon saw its stock decline by 50% in 2022.
But so far Amazon appears to be turning that around. In the company's most recent second-quarter results, Amazon posted $2.1 billion in operating income between its North American and international segments thanks in large part to its cost-savings from regionalizing fulfillment in the U.S. Over the last year, Amazon has transitioned from a single delivery network to eight separate regions that serve smaller areas and CFO Brian Olsavsky says this is resulting in faster delivery speeds, better inventory placement, and fewer miles traveled.
With this renewed focus on retail profitability, Amazon as a whole generated roughly $7.8 billion in free cash flow this quarter, versus a loss of $23.5 billion during the same time last year.
AMZN Operating Income (Quarterly) data by YCharts
Growth outside of retail
Beyond retail, Amazon is also home to the world's largest cloud computing business, Amazon Web Services (AWS). AWS has seen remarkable growth over the last decade going from just $3 billion of revenue in 2013 to $85 billion over the last 12 months. However, that rate of growth has decelerated quickly over the last year and a half as companies tried to save money by optimizing their cloud spending. This slowdown in revenue growth at the company's leading profit driver led to lots of concern from investors.
But those worries are now beginning to fade. In the company's recent second-quarter earnings report, AWS reported 12% revenue growth with management stating that growth rates are beginning to stabilize. With most of AWS' customers having already reduced costs, Olsavsky said, "Having a large diverse customer base that is mostly cost-optimized sets us up well for future growth."
While the stable growth from AWS has certainly reignited investor enthusiasm, there's another segment that's quietly delivering impressive growth for Amazon as well: advertising. Amazon is home to the third-largest advertising business in the U.S. behind just Alphabet and Meta Platforms. Amazon's advertising business, which is driven by product promotions on Amazon's e-commerce platform, generated $41 billion in revenue over the last 12 months and delivered 22% growth in the most recent quarter.
As advertising and cloud computing revenue both continue to outpace the growth of Amazon's overall business, profit margins should begin to increase for the company as a whole.
Does Amazon still have room to run?
With Amazon's recent improvement in the profitability of its retail segments and the impressive growth of its higher-margin offerings like AWS and advertising, it doesn't seem too far-fetched to imagine that Amazon could eventually generate 10% operating margins or higher. Applying that to Amazon's current revenue base of $538 billion would mean about $54 billion in annual operating income. At Amazon's current enterprise value of $1.55 trillion, that would imply that Amazon trades at about 29x potential operating earnings.
While that doesn't strike me as a screaming buy, it feels like a reasonable price to add some shares or continue holding thanks to its clear competitive advantage with its logistics network and ample avenues to continue growing its overall revenue.
