A fresh quarterly earnings season is underway in corporate America. Hundreds of companies will report their results over the next few weeks, but investors will be particularly focused on the multitrillion-dollar tech giants that are dominating the artificial intelligence (AI) race. Given their size and strong growth rates, their results could influence the direction of the S&P 500 for the next several months.
Amazon (AMZN 1.16%) will release its report for the fourth quarter of 2024 (ended Dec. 31) next Thursday, Feb. 6. Despite Amazon being the world's biggest e-commerce company, Wall Street will likely be more focused on its cloud computing platform, Amazon Web Services (AWS), because it's home to a number of industry-leading AI projects.
Should investors buy the stock ahead of next week's report?
All eyes on the cloud
AWS is the world's largest cloud computing platform. It provides businesses with hundreds of different solutions to help them manage their digital transition, from simple data storage to complex software development tools. However, AWS is also trying to dominate the three core layers of AI: Infrastructure (data centers), large language models (LLMs), and software.
Like many cloud providers, AWS is filling its data centers with powerful graphics processors (GPUs) from suppliers like Nvidia, and renting the computing capacity to AI developers for a fee. However, Amazon has also designed its own chips like the Trainium2, which can save developers up to 40% on training costs compared to competing GPUs. Demand is so high that the company is producing more chips than it originally planned.
Amazon also built a family of LLMs called Titan, which are available on the AWS Bedrock platform along with several other models from leading third parties like Anthropic and Meta Platforms. Data center computing capacity and ready-made LLMs are the two main ingredients businesses need to build their own AI software.
Finally, to cover the third layer, AWS built an AI virtual assistant called "Q." It can help businesses quickly identify trends in their internal data to unlock new revenue opportunities. Q is also one of the best assistants in the industry at generating computer code, so it's a highly effective tool for programmers and software developers.
During the third quarter of 2024 (ended Sept. 30), AWS generated a record $27.4 billion in total revenue. It marked a 19% increase from the year-ago period, and that growth rate has accelerated over the past year.
But it gets better. Amazon said AI revenue within AWS increased by a triple-digit percentage during Q3, and it's growing three times faster than the cloud business did at the same stage of its life cycle. In the upcoming Q4 report next week, investors should look for another record AWS result driven by AI.
Wall Street expects significant earnings growth in Q4
Efficiency has been a big point of focus for Amazon over the last couple of years, as elevated inflation and high interest rates have dented economic activity. Although AWS is one of the fastest-growing (and most profitable) parts of Amazon's business, its e-commerce segment still generates the most revenue.
In 2023, Amazon overhauled its logistics network by breaking the U.S. market into eight distinct regions. It means the company now stores different products in different fulfillment centers, depending on their popularity in each given region. It reduces the distance each order travels before eventually reaching the customer, driving down Amazon's cost per order and boosting the e-commerce segment's profitability.
The company is also investing in AI to improve efficiency. It launched Project Private Investigator in its fulfillment centers last year, which uses AI and computer vision to identify defective products before they are shipped to customers, which reduces the cost of processing returns and refunds.
The changes have culminated in a significant increase in Amazon's profits. Wall Street's consensus forecast (provided by Yahoo!) suggests the company could deliver $1.48 in earnings per share (EPS) during Q4, which would be a 48% jump from the year-ago period. It will also take its full-year EPS for 2024 to $5.15, representing a whopping 77% growth compared to 2023.
Image source: Amazon.
Amazon stock appears expensive, but its valuation might be justified
Before considering whether to buy Amazon stock ahead of Feb. 6, we should first examine its valuation. Based on the company's trailing-12-month EPS of $4.67, the stock trades at a price-to-earnings (P/E) ratio of 50.2. That looks expensive at face value, considering the Nasdaq-100 index (which is home to many of Amazon's big tech peers) trades at a P/E ratio of just 33.1.
However, 50.2 is actually significantly below Amazon's five-year average P/E ratio of 85.5. Plus, as I highlighted earlier, the company's earnings are growing rapidly. According to Wall Street, Amazon could deliver $6.21 in EPS during 2025, which places the stock at a forward P/E ratio of just 37.8:
AMZN PE Ratio data by YCharts
Simply put, Amazon stock might be a good value right now for any investor who can hold on to it for at least the next year or two. A longer investment horizon of five years will probably yield an even greater benefit, especially since Amazon is still writing the early chapters of its AI story.
In my opinion, Amazon is in such a great position that one single quarter is unlikely to alter the stock's upward trend, which extends all the way back to its initial public offering in 1997. Therefore, investors are likely to earn a positive long-term return whether they buy the stock before Feb. 6 or wait until after the results are released.
