Amazon (NASDAQ: AMZN) shook up the traditionalistic Dow Jones Industrial Average in late February when it joined the index, infusing a dose of growth into its historically conservative composition.
As of June 27, Amazon has taken the lead as the top-performing stock in the index, riding a wave of continued success that has left investors wondering if it’s still a wise buy at its all-time high.
Delving into the reasons behind Amazon’s soaring trajectory and evaluating whether this growth phenomenon is a prudent investment near its peak.
Image source: Getty Images.
The Cash Gush at Amazon
Amazon, woven into its title, holds a deceptive narrative – much like Google capturing hearts as Alphabet, and Facebook morphing into Meta Platforms. Just as YouTube is Alphabet’s gem, a similar story unfolds with Amazon Web Services (AWS), Amazon’s true pot of gold.
AWS stands tall as the reigning monarch of cloud infrastructure, adorned with a 50.1% market share among top cloud providers and a colossal 31% growth in customer count year-on-year as per HG Insights 2023 Infrastructure as a Service Market Report.
What truly dazzles is when we contrast Amazon’s performance over the last five years, showcasing the undeniable impact of AWS on its overarching business.
Metric | Q1 2020 TTM | Q1 2021 TTM | Q1 2022 TTM | Q1 2023 TTM | Q1 2024 TTM |
|---|---|---|---|---|---|
North America revenue | $181.09 billion | $254.52 billion | $284.71 billion | $323.52 billion | $362.29 billion |
North America operating income | $6.06 billion | $10.79 billion | $2.25 billion | ($381 million) | $18.96 billion |
International revenue | $77.64 billion | $115.96 billion | $125.9 billion | $118.37 billion | $134.01 billion |
International operating income | ($2 billion) | $2.37 billion | ($3.46 billion) | ($7.71 billion) | $903 million |
AWS revenue | $37.55 billion | $48.65 billion | $67.14 billion | $83 billion | $94.44 billion |
AWS operating income | $10.05 billion | $14.62 billion | $20.89 billion | $21.45 billion | $28.93 billion |
Data source: Amazon.
A striking discord emerges in Amazon’s North America and international operating incomes, coupled with a somewhat sluggish top-line growth. AWS, however, stands tall as a behemoth, with its operational income nearly tripling in a mere five years.
The most remarkable revelation here lies in the fact that AWS’s operational income has outpaced its revenue growth, hinting at an enhancement in margins. Gone are the days when doubts loomed over Amazon’s investment proposition due to AWS struggling to sustain margins amidst fierce competition. The numbers paint a different, more buoyant picture – a probable reason for the stock’s recent market-shattering performance.
An Elevated Business Model
Amazon’s legacy of plowing back profits into the company makes metrics based on net income, like the price-to-earnings ratio, misleading. Historically, Amazon assessed its performance through the prism of the price-to-sales ratio, juxtaposing its value against revenue. A peek at the subsequent chart unveils Amazon’s elevated P/S ratio compared to historical benchmarks, signaling a stock seemingly at a premium.