Amazon (AMZN), the e-commerce and cloud giant, saw an outstanding performance in 2024, reaching an all-time high of $233. Gaining 50%, Amazon outpaced its benchmark indices, including the S&P 500 (SPX), which rose 23%. The key question is whether Amazon’s growth momentum will persist in 2025. The answer, I believe, is a resounding yes, fueled by a resurgence in AI-driven AWS growth, a well-diversified business model, generative artificial intelligence opportunities, and robust cash flow expansion.
With the 2024 trading year now over, let’s delve into the stock performance and prospects of the world’s leading retailer and multifaceted conglomerate, Amazon.
Amazon has come a long way from its origins as an online retailer, transforming into a multifaceted powerhouse with a uniquely diversified business model. The company boasts a vast and loyal customer base, with millions of users worldwide. In the cloud computing space, Amazon remains the market leader, commanding over 30% of the market despite stiff competition from Microsoft’s (MSFT) Azure. Its AWS (Amazon Web Services) segment continues to be the primary driver of profits.
During Q3 FY2024, AWS sales grew by an impressive 19.1% year-over-year, reaching $27.5 billion, fueled by surging AI-driven demand. The segment’s operating income soared 48.6% year-over-year to $10.4 billion, with its operating margin expanding significantly to 38.1% from 30.3% in the same period last year.
Even in the e-commerce industry, Amazon continues to dominate, supported by its robust Prime membership base exceeding 200 million subscribers. Despite intensifying competition, the company maintains over 30% market share in the U.S. Notably, its closest competitor, Walmart (WMT), lags far behind, registering a single-digit market share. During Q3, Amazon’s North American retail segment posted a 9% revenue increase and a striking 31% growth in operating income.
Amazon’s digital advertising business has also shown remarkable growth. Q3 Advertising revenues rose 19%, driven by strong performance in its sponsored-ad segment. Advertising has contributed over $50 billion in revenue over the past 12 months.
Additionally, Amazon is making significant strides in pharmacy services. The company recently announced plans to expand its Amazon Pharmacy Same-Day Delivery service to nearly half of the U.S. population by 2025. It also aims to roll out new pharmacy locations in 20 additional U.S. cities by the end of next year, underscoring its commitment to scaling this high-potential business segment.
Amazon’s ability to drive growth across multiple verticals while maintaining its leadership in key markets highlights the strength and resilience of its business model as it continues to innovate and expand.
2024 marked a transformative year for artificial intelligence, and Amazon excelled by integrating AI across its business operations. Years of substantial capital investments in AI have enabled the company to develop cutting-edge solutions that enhance its AI offerings.
At its AWS annual re:Invent 2024 conference, Amazon unveiled its ambitious AI roadmap, including the development of a supercomputer powered by its proprietary Trainium chips. These chips aim to compete with Nvidia’s (NVDA) dominant GPUs, potentially making it a viable alternative. Additionally, Amazon announced plans to build a specialized server for AI startup Anthropic, underscoring its commitment to AI innovation.
AI is set to remain a core driver of Amazon’s revenue and profitability in the years ahead, cementing its role as a foundational pillar of the company’s long-term growth strategy.
Amazon’s financial performance over recent years underscores its remarkable growth trajectory. Between FY2016 and FY2024, revenues more than quadrupled from $136 billion to $575 billion, achieving a compound annual growth rate (CAGR) of 22.9%. Even more impressive, earnings grew over 12x during the same period, climbing from $2.4 billion to $30.4 billion, reflecting a CAGR of an unbelievable 43.7%. This robust growth has been driven by strong contributions across Amazon’s diversified business segments.
These achievements speak volumes about Amazon’s capacity for innovation and resilience. Looking ahead, revenue and earnings growth is expected to accelerate, bolstered especially by a sturdy growth in AWS revenue, driven largely by generative AI innovations.
On October 31, Amazon reported Q3 results. The company’s adjusted earnings per share (EPS) of $1.43 handily beat analysts’ estimates of $1.14 per share and jumped 52.1% year-over-year. Net sales soared 11% year-over-year to about $158.9 billion. What’s even more impressive is that operating income grew by 56% to $17.4 billion, while trailing 12-month adjusted free cash flow climbed by 122.9% year-over-year to $47.7 billion.
For Q4, Amazon expects net sales to grow in the range of 7%-11%, which equates to revenue of between $181.5 billion and $188.5 billion. Furthermore, operating income is projected to range between $16.0 – $20.0 billion, versus the $13.2 billion seen in the fourth quarter of 2023.
AMZN stock’s valuation is another plus. As Amazon houses multiple businesses, I believe the EV/EBITDA ratio is the best metric to evaluate the stock’s valuation. Being an industry leader, the company has historically traded at high multiples. At present, however, Amazon stock is trading at around 16.9x EV/EBITDA (on a forward basis) compared to its own five-year historical average of 19.8x. This implies a discount of over 15%.
For the sake of comparison, let’s also look at its price-to-sales (P/S) ratio. Amazon is trading at a forward P/S ratio of 3.7x. In contrast, cloud computing and tech giant Microsoft trades at a P/S of 11.3x, while social networking company Meta Platforms (META) trades at a P/S of about 9.2x.
Therefore, I believe AMZN stock is trading at an attractive valuation and presents a great buying opportunity, given the strong growth potential across AWS and various business verticals.
Despite the recent stock rally, Wall Street analysts continue to be bullish on Amazon stock. Overall, the stock commands a Strong Buy consensus rating based on 45 Buys and one Hold. AMZN stock’s average price target of $248.35 implies 13.2% upside potential from current levels.
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The AI opportunity for Amazon is immense, and its growth trajectory is unlikely to plateau at the impressive highs reached in December 2024. With strong financial performance, a strategic emphasis on AI innovation, and continuous expansion in AWS, Amazon is well-positioned for sustained long-term growth.
I anticipate that Amazon will continue to capitalize on opportunities across its diverse business segments in FY2025 and beyond. Therefore, despite the stock’s remarkable rally in FY2024, I remain confident in buying Amazon shares and holding them for the long term.
