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Exploring Amazon’s Surge in the Dow Jones in 2024 Exploring Amazon’s Surge in the Dow Jones in 2024

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.

A person smiles while looking at a laptop computer.

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.

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AMZN Chart

AMZN data by YCharts

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.



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Insightful Analysis on Amazon’s Financial Performance

Deciphering Amazon’s Financial Fortunes

Amazon’s Prowess in Financial Metrics

Amazon’s financial landscape, as depicted by metrics like the P/S ratio and cash from operations, offers a window into its evolving business dynamics. The e-commerce behemoth’s trajectory in the market is not just about numbers; it’s a narrative of adaptability and resilience in the face of changing market conditions.

A Glimpse into the P/S Ratio

Scrutinizing Amazon’s P/S ratio reveals a tale of transformation. The traditional yardstick for valuation may falter when assessing Amazon, given its revolution spurred by Amazon Web Services (AWS). To truly gauge Amazon’s value, looking at the P/S ratio alongside operating income and margin becomes imperative.

Visualizing Success with Operating Income

Amazon’s success story unfolds vividly through its operating income metrics. With a robust TTM operating income nearing $100 billion and soaring operating margins fueled by AWS and resurgent North American and international segments, Amazon’s growth story resonates powerfully.

Assessing Amazon’s Investment Appeal

While Amazon stands tall in its industry, its stock chart hints at a stretched valuation. As the sage Warren Buffett once remarked, paying a premium often accompanies consensus optimism. Amazon’s journey from a beleaguered past to a current market darling underscores the ebbs and flows of investor sentiment.

The Road Ahead for Amazon

Investing in Amazon today is akin to navigating a landscape of rich possibilities tempered by valuation realities. Amazon’s evolution demands a keen eye on sustaining higher margins and organic growth. As the stock rallies, the pressure on its valuation mounts, yet the long-term trajectory of compounding earnings instills confidence.

Strategic Considerations for Investment

Before delving into Amazon’s stock, weighing the broader investment landscape remains crucial. The Motley Fool Stock Advisor flags Amazon as a strong contender but underscores a diverse portfolio as critical. Reflecting on past success stories like Nvidia’s meteoric rise underscores the potential power of strategic investment choices.

*Stock Advisor returns as of July 2, 2024