Amazon Stock Analysis: Multiple Growth Catalysts Signal Strong Buy Opportunity

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The last 12 months have been successful for me Amazon (NASDAQ:AMZN) shares. Tech and e-commerce stocks are up 40% during that time. While it’s smart to buy during corrections, Amazon stock will continue to be a wealth creator for years to come.

This article discusses the reasons to be bullish on Amazon. The central point of the discussion is that Amazon has multiple business growth drivers. Furthermore, all segments are delivering solid numbers, and Amazon stock seems attractively valued even at a price-to-earnings (P/E) ratio of 40x.

I have to add that the Amazon bull case is not just about healthy revenue growth. I expect sustained improvement in operating margins over the next few years. This will translate into higher cash flow and support value creation.

Of course, the bullish thesis has its risks. However, the upside far outweighs the risks, making Amazon stock an attractive buy.

Growth in all business segments

Amazon has a diverse revenue stream, and let me start with a less talked about segment. In the first quarter (Q1) of 2024, the company reported $11.8 billion in advertising revenue, up 24% year over year. There are two important things to note about this segment.

First, advertising services is a high-margin business, and as revenues grow, this will likely impact overall profitability. Furthermore, the online advertising market is expected to grow at a CAGR of 10.85% between 2024 and 2029. The largest and fastest-growing market is North America, and Amazon is positioned to benefit from favorable industry tailwinds.

I’m also bullish on Amazon Web Services’ renewed growth momentum. In Q1 2024, the segment saw a 17% year-over-year revenue increase to $25 billion. I expect the growth acceleration to continue with Generative AI, which is a significant contributor to the cloud business. It’s worth noting that Amazon believes “a larger long-term business opportunity could come from companies running their AI models in its cloud.”

Growth in core business and margin improvement

For Amazon, online sales remain the largest source of revenue. In the first quarter of 2024, online stores recorded revenue of $54.7 billion, up 7% year over year. Additionally, brick-and-mortar stores saw revenue increase by 6% to $5.2 billion.

There are two important things to note about online stores. First, the global e-commerce market is expected to be worth $47.73 trillion by 2030. Sales are expected to grow at a CAGR of 12.22% between 2022 and 2030. As macroeconomic headwinds related to possible interest rate cuts recede, I expect Amazon’s online store business growth to accelerate.

In addition, in Q1 2024, Amazon recorded 60% of sales in North America, and 18% of sales came from Amazon Web Services. International revenues were only 18% of total sales. I see a lot of growth potential in emerging markets, which will increasingly contribute to total revenue.

From a margin improvement perspective, Amazon is looking to use advanced robots in its fulfillment centers. Additionally, the company will use AI to streamline supply chain operations. This is likely to have a positive impact on key margins over the next few years. It would also mean healthy growth in operating cash flow and free cash flow.

Summary: Amazon stock will continue to trend higher

Amazon has a diversified business, with all segments delivering solid growth. Amazon Web Services and advertising are high-margin businesses that will continue to grow cash flow. In addition, automation and AI will support margin improvements in the core commerce business. Amazon’s story, then, is not just about revenue growth.

In terms of risk, Amazon relies on cross-border e-commerce. Geopolitical tensions with China could impact growth if trade restrictions exist. However, this view is purely speculative, and the numerous positives outweigh the concerns. Therefore, I would consider accumulating Amazon stock during corrections with a long-term investment horizon.

As of the date of publication, Faisal Humayun did not have (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are the author’s own, subject to InvestorPlace.com Publication Guidelines.

At the time of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.

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