It’s been a mere three months into 2024, and the stock of the retail giant, Amazon (NASDAQ: AMZN), has surged by almost 20% year to date, hovering near its all-time high. For ardent followers of Amazon, this upward trajectory shouldn’t come as a surprise.
Over the nearly three decades since its initial public offering, there’s been one financial metric that has consistently been a harbinger of Amazon’s stock price movement like no other. Let’s delve into what this metric is and how it is forecasting the future of Amazon stock.
The Crucial Chart for Amazon Investors
While revenue growth commands attention, the focus of investors gravitates towards the company’s operating income. Unlike other non-core elements like taxes and interest income, operating income encompasses only core aspects of the business.
For Amazon, there exists a robust correlation between its stock price and operating income, as depicted by the compelling 20-year chart below.
The years 2022 and 2023 vividly portray this relationship. In 2022, Amazon experienced a 51% decline in operating income, closely followed by a 50% drop in the stock price. Conversely, in 2023, the company’s operating income soared by 202%, correlating with an 81% spike in the stock price.
This historical data suggests that while Amazon’s stock movements may not perfectly mirror the fluctuations in its operating income, there exists a strong directional relationship between the two.
The booming success of Amazon Web Services (AWS), the company’s cloud computing arm, has been a major driver of its escalating operating income over the past decade. AWS, which saw net sales surge from $3.1 billion in 2013 to $90.8 billion in 2023, accounted for a substantial portion of Amazon’s operating profit, hovering around 67% annually.
Predicting the Future
Amazon’s management has already provided operating income guidance for the upcoming first quarter, anticipating earnings ranging between $8 billion and $12 billion. While this wide range reflects the complexity of Amazon’s operational landscape, even at the lower end, an $8 billion operating income would signify a remarkable 67% year-over-year growth.
Moreover, with limited seasonality in Amazon’s profits, this strong start in Q1 is indicative of a promising year ahead. The substantial backlog for AWS, amounting to $156 billion in contracted performance obligations by the end of 2023, paints a bright picture for the future.
Considering AWS’s consistent year-over-year growth in contracted performance obligations, it stands to reason that the prospects for 2024 and beyond are exceptionally favorable.
The bright outlook for AWS’s net sales inherently translates to a substantial surge in Amazon’s overall operating income, historically a harbinger of positive stock performance for the company.
While investing is never without its risks and uncertainties loom over the future, signs point toward an upward trajectory for Amazon’s primary profit driver, promising continued success for shareholders.
Advisory on Amazon Investment
Before leaping into an investment in Amazon, it’s prudent to ponder over a few factors:
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