It’s been a good last 12 months for Amazon (NASDAQ:AMZN) stock. During this period, the tech and e-commerce stock has surged by 40%. While it’s prudent to buy on corrections, Amazon stock will continue to be a wealth creator in the coming years.
This column discusses the reasons to be bullish on Amazon. The central idea of the discussion is the point that Amazon has multiple business growth triggers. Further, all segments are delivering robust numbers and Amazon stock looks attractively valued even at a forward price-to-earnings ratio (P/E) of 40x.
I must add that the Amazon bull case is not just about healthy revenue growth. In the next few years, I expect sustained improvement in operating margins. This will translate into higher cash flows and support value creation.
Of course, there are risks to the bull thesis. However, the positives far outweigh the risks, making Amazon stock an attractive buy.
Growth Across Business Segments
Amazon has a diversified revenue stream and let me start with the lesser talked about segment. For the first quarter (Q1) of 2024, the company reported advertising service revenue of $11.8 billion, which was higher by 24% on a year-on-year basis. For this segment, there are two important points to note.
First, advertising services is a high-margin business and as revenue swells, it’s likely to have an impact on overall profitability. Further, the online advertising market is expected to grow at a CAGR of 10.85% between 2024 and 2029. The largest and fastest growing market is North America and Amazon is positioned to benefit from industry tailwinds.
I am also positive about the renewed growth momentum for Amazon Web Services. For Q1 2024, the segment reported 17% year-on-year revenue growth to $25 billion. I expect the growth acceleration to be sustained backed by Generative AI that’s significantly contributing to the cloud business. It’s worth noting that Amazon believes that a “bigger long-term business opportunity could come from companies operating their AI models on its cloud.”
Core Business Growth And Margin Improvement
For Amazon, the biggest revenue contributor remains online sales. For Q1 2024, online stores reported revenue of $54.7 billion, which was higher by 7% on a year-on-year basis. Further, physical stores reported a 6% revenue growth to $5.2 billion.
Related to online stores, there are two important points to note. First, the global e-commerce market is expected to be worth $47.73 trillion by 2030. Between 2022 and 2030, sales are expected to grow at a CAGR of 12.22%. As macroeconomic headwinds wane on possible rate cuts, I expect Amazon’s online store business growth to accelerate.
Further, for Q1 2024, Amazon reported 60% sales from North America with 18% sales coming from Amazon Web Services. International revenue was just 18% of total sales. I see ample headroom for growth in emerging markets that will increasingly contribute to the total revenue.
From a margin improvement perspective, Amazon intends to use advanced robots at its fulfillment centers. Further, the company will be using AI to streamline supply chain operations. In the next few years, it’s likely to have a positive impact on key margins. This would also imply a healthy upside in operating and free cash flows.
Bottom Line: Amazon Stock Will Continue to Trend Higher
Amazon has a diversified business and all segments have been delivering robust growth. Amazon Web Services and advertising are high-margin businesses that will continue to boost cash flows. Additionally, automation and AI will support margin improvement in the core commerce business. The Amazon story is therefore not just about top-line growth.
In terms of risks, Amazon has a reliance on cross-border e-commerce trade. Geopolitical tensions with China can impact growth if there are trade restrictions. However, this view is purely speculative and the multiple positives overshadow the concern. I would therefore look at accumulating Amazon stock on corrections with a long-term investment horizon.
On the date of publication, Faisal Humayun did not hold (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.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.