Amazon: It’s Time To Be Greedy (NASDAQ:AMZN)

This post was originally published on NASDAQ:AMZN

Thanks to the overall improvement of the economy, Amazon (NASDAQ:AMZN) has been able to perform better than expected in the recent quarter and there’s an indication that its business would be able to create even more value in the following months as macro risks subside. The company’s stock is already up over 10% since I published my latest article on it in May, but considering that most of Amazon’s businesses are expected to continue to exceed expectations in Q3 and beyond, there are reasons to believe that shares have even more room for appreciation as the growth story is far from over.

More Growth On The Horizon

Amazon reported its Q2 earnings results last week which showed that the company’s revenues increased by 10.8% Y/Y to $134.3 billion and were above the estimates by almost $3 billion, while its EPS stood at $0.65. At the same time, sales of its North America and international segments were up 11% Y/Y and 10% Y/Y to $82.5 billion and $29.7 billion, respectively.

Such a great performance in North America in particular was mostly thanks to the overall improvement of the U.S. economy which has been resilient in recent months as inflation is on its way down. The latest data shows that the U.S. GDP in Q2 also increased by 2.4%, which is much better in comparison to Q1 and greatly above the estimates, as consumer confidence jumped to its two-year high.

The expected further growth of the economy is likely one of the main reasons why Amazon unveiled relatively aggressive growth targets for Q3 as it expects to generate between $138 billion and $143 billion in net sales during the following quarter, which translates to a Y/Y growth rate of between 9% and 13%. At the same time, as consumers begin to spend more, the company also expects its operating income to be between $5.5 billion and $8.5 billion in Q3, which is significantly above the $2.5 billion that it generated during the same period last year.

What’s more important to note is that the company also expects a favorable impact from foreign exchange rates thanks to the depreciation of the U.S. dollar as a result of the potential end of the tightening cycle by the Federal Reserve at a time when other central banks still battle the inflation and continue to raise rates more aggressively. This wasn’t the case a year ago when the ECB was playing the waiting game while the Fed acted more aggressively, which in the end resulted in foreign exchange losses for Amazon back then. As a result of this, it’s safe to assume that the growth story of Amazon’s core business is far from over and the company could very well achieve its targets given its exceptional performance in Q2.

In addition to this, there are reasons to be optimistic about the performance of the company’s cloud division in the future as well. Even though the cloud-computing business showed a disappointing performance in the past due to the challenging macro environment that made customers cut their cloud spending, it appears that the industry is on the path to recovery as Amazon’s management itself noted that the revenue growth has now stabilized. Despite all the headwinds, the company’s cloud-computing business grew 12% Y/Y to $22.1 billion in Q2, and AWS remained the biggest cloud provider in the world with a 32% market share at the end of June.

Considering that the overall cloud market is once again expected to grow at an aggressive rate and almost double in the next five years to over $1 trillion, Amazon has everything going for it to continue to create additional shareholder value for years to come. Add to all of this the fact AWS could strengthen its lead if Amazon decides to become an anchor investor in Arm’s upcoming IPO and it becomes obvious that the growth story in the cloud business is far from over as well.

Great New Opportunities Ahead

In addition to potentially backing Arm, Amazon has also been actively expanding its presence in the ever-growing generative AI field in recent months. After the rapid success of ChatGPT at the end of last year, Amazon has been actively working on ensuring that it gets a large piece of this expanding market that’s expected to be worth over $1 trillion in the following years. Last month, the company launched a platform called Bedrock that makes it possible for developers to build generative AI apps and is already used by thousands of customers. At the same time, CEO Andy Jassy during the latest earnings call stated that all of the company’s businesses are currently exploring different generative AI initiatives, which is a clear indication that Amazon is planning on becoming a major player in the field as the TAM is about to expand exponentially with each passing year.

On top of that, as Amazon explores generative AI opportunities, it’s also gaining an edge in the digital advertising industry. Back in December, I described how Amazon is currently disrupting the Google-Meta duopoly in the digital advertising market and has all the chances to gain an even greater market share of this growing business in the future.

The latest reports indicate that Amazon has been actively growing its market share in the industry and has all the chances to capture over 13% of the market in the next few years as advertisers are beginning to use the company’s advertising tools more actively. In Q2 alone, Amazon’s advertising business generated nearly half of cloud revenues during the period as its advertising revenues increased by 22% to $10.68 billion. At the current growth rate, it would be possible for Amazon’s advertising business to generate as much revenue as the cloud business in the future, which would help the company to create even more shareholder value going forward.

Several Headwinds To Consider

Despite all of the upsides, several headwinds could undermine the bullish thesis and make Amazon’s stock risky to own. First of all, even though the U.S. economy is improving, and Amazon’s performance greatly correlates with how confident consumers are about spending their cash, there’s a risk that if China’s deflationary spiral is not stopped, it could have a disastrous impact on the overall global economy and negatively affect the U.S. consumers. That’s why even though the U.S. is likely to avoid a recession this year, there are still several macro risks that could nevertheless result in a recession next year and hurt Amazon’s growth rates.

At the same time, a tougher regulatory environment is another major issue that investors need to track. I have already highlighted in the past how European regulators are likely to force a spin-off of Google (GOOG)(GOOGL) by the end of this decade due to its breach of EU antitrust laws. It seems that the American regulators want to do the same thing to Amazon, which could face a lawsuit from the FTC at any moment. While FTC so far failed to stop Microsoft’s (MSFT) purchase of Activision Blizzard (ATVI), there’s no guarantee that Amazon would also be able to avoid its fate.

On top of all of this, there are concerns about whether Amazon’s current valuation could be justified in the first place. Considering that the AI-driven market runup could end at any moment, Amazon has little room for error with a forward P/E of over 60x and could be hit the hardest in case of a modest correction. However, despite this, there are still reasons for optimism.

If the U.S. economy continues to grow at the current rate and can mitigate global risks thanks to the robust domestic consumer market, then Amazon’s growth opportunities are more than likely to outweigh the valuation concerns. Let’s not forget that despite its rich valuation, Amazon has received 30 or more EPS and revenue upward revisions from the street in recent months as the business’s growth story remains intact after the latest earnings results and upbeat guidance. That’s why there are reasons to believe that Amazon’s stock has more room for growth if macro risks subside and an additional ~20% upside is not something out of the ordinary despite all the downside.

The Bottom Line

At this stage, it would be safe to say that there’s nothing not to like about Amazon in its current state. Even though the company’s forward P/E of over 60x is pricy, it’s nevertheless not something out of the ordinary given the multiples at which Amazon and its peers traded during the post-Covid recovery period. While we’re in a different environment now and a tight monetary policy could limit the overall upside, it would be safe to assume that Amazon nevertheless has everything going for it to continue to grow at a decent rate even today as long as the U.S. economy continues to improve. Add to all of this the upside from Amazon’s entrance into the generative AI field along with the aggressive growth of the company’s advertising business, which has the potential to generate as much revenue as the cloud business, and it becomes obvious that the growth story is far from over despite all the challenges.