What’s Behind The 43% Rise In Amazon Stock?
In the past twelve months, Amazon stock (NASDAQ: AMZN) has risen 16%, closely tracking the NASDAQ’s 14% gain. This year, however, has been a bit of a roller coaster for Amazon stock. After hitting highs of over $240 in January, the stock fell more than 30% to just under $170 by April. This decline was largely due to the impact of President Trump’s assertive trade policies. However, as trade tensions eased, the stock bounced back 30% from its lows.
Looking at a slightly longer timeframe, AMZN stock is up 43% since early 2024. This substantial increase can primarily be attributed to three key factors:
- a 30% rise in the company’s price-to-sales (P/S) ratio, climbing from 2.8 in 2023 to 3.6 currently; and
- a 13% increase in revenue, growing from $575 billion to $650 billion; partly offset by:
- a slight 2% rise in total shares outstanding to 10.8 billion.
We’ll delve into the specifics of these factors. Our dashboard on Why Amazon Stock Moved has more details. While AMZN stock has had a good run, if you want an upside with a smoother ride than an individual stock, consider the High-Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception. Separately, see – What’s Better – Circle Stock Or Bitcoin?
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What’s Behind The Revenue Growth?
Amazon’s revenue growth of 13% since 2023 stems from strong long-term trends across e-commerce, streaming, and digital advertising. While North American sales rose 10% and international sales 9% last year, Amazon Web Services (AWS) was the primary growth engine, surging 19%. This highlights the success of Amazon’s strategic diversification, with AWS proving to be an exceptionally valuable segment.
Looking ahead, AWS will remain key to Amazon’s growth, but the company faces rising competition in cloud computing from Microsoft Azure and Google Cloud. Microsoft’s strong partnership with OpenAI and significant AI investments, alongside Google’s rapid expansion of generative AI cloud services, pose considerable challenges. To maintain its market leadership in this evolving tech landscape, Amazon will need continuous innovation. Like its competitors, Amazon is investing tens of billions in AI-related capital expenditures.
What’s Driving The Valuation Higher?
AWS has significantly transformed Amazon’s financial performance, primarily by boosting its overall profitability. Since 2023, Amazon’s operating margin has dramatically expanded by 72%, rising from 6.4% to 11.0%. This improved profitability, combined with strong sales growth and AWS’s strategic expansion, has positively reshaped investor sentiment. Consequently, the company’s price-to-sales (P/S) valuation multiple has increased by 30%, from 2.8x trailing revenues in 2023 to 3.6x currently.
But What Next? Is AMZN Stock A Buy At $220?
At its current price of $217, Amazon’s stock is trading at a price-to-sales (P/S) ratio of 3.6x, which aligns closely with its five-year average of 3.2x. However, there are compelling reasons to believe the valuation multiple could expand further.
Amazon’s strategic AI investments are poised to fuel significant growth across its businesses. Within AWS, increased demand from companies developing and deploying AI applications is expected to directly boost cloud infrastructure sales. Simultaneously, AI will enhance Amazon’s retail operations through improved product recommendations, search, and personalized shopping experiences. These advancements could lead to higher conversion rates, increased average order value, and more effective ad targeting across its platform and the wider digital advertising landscape.
Consequently, Amazon projects low double-digit sales growth over the next three years, with bottom-line growth expected to be even more substantial. This improved profitability, combined with continued AWS expansion and Amazon’s sustained e-commerce market dominance, presents a strong case for an expanded valuation multiple. Investors are likely to recognize these strategic AI initiatives as key drivers of future growth and value creation.
But Account For Risks
Amazon stock isn’t without its risks. During the inflation-driven market sell-off in 2022, AMZN plummeted 52%, falling from a January peak of $170.40 to $81.82 by December. This decline significantly outpaced the S&P 500’s 25.4% drop. AMZN didn’t recover to its previous high until February 2024, highlighting both its volatility and resilience. Earlier this year, we saw a similar trend during the trade war concerns, where the stock plunged 30%, compared to a 19% peak-to-trough decline for the S&P 500.
Beyond broader market and geopolitical factors, there are company-specific risks related to Amazon’s substantial capital expenditures. Since 2023, Amazon has invested a staggering $161 billion in CapEx. A key question remains: what if these massive investments don’t yield the expected returns?
In fact, financial risk is just a small part of the risk assessment framework we apply while constructing the Trefis High Quality (HQ) Portfolio. It is a collection of 30 stocks, and has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
While AMZN stock looks like it may see higher levels, it is helpful to see how Amazon’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
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