Amazon (NASDAQ: AMZN) has ascended to the prestigious $2 trillion club, a select few crowning jewel companies that stand atop the global business landscape. Among its peers, I contend that Amazon’s investment proposition shines just as bright, if not brighter. I present three compelling reasons why Amazon is not just a buy but a strong buy deserving space in any investor’s portfolio.
Unlocking the Potential of AWS
Artificial intelligence has pervaded our world, and underneath its marvel lies the critical computing infrastructure. Amazon Web Services (AWS) stands as the premier provider of cloud computing services, facilitating the AI revolution for countless organizations. While maintaining its lead despite fierce competition in the AI arena, AWS’s recent financial performance paints a promising picture. In the first quarter, AWS witnessed a robust 17% year-over-year revenue surge, signaling an accelerated growth trajectory. Management’s optimistic outlook on AWS underscores its pivotal role as a cornerstone of Amazon’s profit realm. Though AWS contributes merely 18% to Amazon’s revenue, it propels a substantial 62% of its profits, promising amplified returns for investors if its growth trajectory outpaces the company as a whole. A promising harbinger indeed.
Companywide Profitability Surge
Although AWS spearheads Amazon’s profit engine, the company’s commerce divisions are not lagging behind. Led by CEO Andy Jassy’s strategic push towards profitability enhancement, both the North American and international divisions have displayed impressive results. The increase in operating margins for these divisions from Q1 2023 to Q1 2024 is a testament to Amazon’s concerted efforts towards bolstering its bottom line. Despite operating in cutthroat industries with razor-thin margins, the palpable improvements across these segments have translated into record cash flow generation, painting a rosy financial outlook for Amazon.
| Division | Q1 2023 Operating Margin | Q1 2024 Operating Margin |
|---|---|---|
| North America | 1.2% | 5.8% |
| International | (4.3%) | 2.8% |
Data source: Amazon.
While these operating margins pale in comparison to AWS’s stellar 38%, the demonstrated betterment in these traditional divisions coupled with Amazon’s heightened free cash flow indicate a promising trajectory for the company’s overall financial health.
Advertising: The New Champion
Amazon’s legacy of launching lucrative business segments continues with advertising emerging as a potent revenue stream. In Q1, Amazon’s advertising arm raked in an impressive $11.8 billion, showcasing a robust 24% year-over-year growth and cementing its status as Amazon’s fastest-growing division. Despite its smaller scale compared to AWS, the advertising segment is making significant strides at an accelerated pace, a testament to its enormous potential and Amazon’s diversified revenue streams.