Amazon (AMZN 0.87%) soared 80% in 2023, so you may think the e-commerce and cloud computing giant's potential for gains this year is limited. But it's important to remember that just because a stock advanced significantly today doesn't mean it will decline tomorrow. Instead, the price movement generally is linked to the company's earnings potential or other concrete factors like dividend growth or even progress along a path to recovery.
In the case of Amazon, there's reason for the stock to continue gaining. In fact, I can think of three undeniable reasons the shares could explode higher in 2024. Let's check them out.
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1. Recent cost-structure efforts should pay off
Amazon ran into trouble back in 2022 as rising inflation weighed on its costs and on consumers' wallets. So the company decided to revamp its cost structure and made several big moves, such as cutting tens of thousands of jobs, improving efficiency across its fulfillment network, and shifting investment into high-growth areas.
These efforts have started to pay off, but we're still in the early stages of this recovery and growth story. For example, last year, Amazon shifted its U.S. fulfillment network to a regional model from a national one.
The idea was to shorten delivery distances, which saves time and money for Amazon. The quicker deliveries please shoppers, keeping them coming back. So it's a winning situation for everyone.
"We have a long way before being out of ideas to improve cost and speed," Chief Executive Officer Andy Jassy said during the most recent earnings call. And this means these efforts should continue to boost earnings well into the future.
NASDAQ: AMZN
Key Data Points
2. Bright signs from AWS
After holding up well for most of 2022, Amazon Web Services (AWS) eventually saw customers tighten their budgets. This resulted in declines in operating income in the cloud computing business.
But in recent times, the picture began to brighten. Customers started to deploy new workloads, and in the third quarter, AWS' revenue and operating income advanced. In September, AWS signed more deals than it did in the entire third quarter. These deals, booked in October, will show up in the fourth-quarter report.
Another reason to be positive about AWS is its investment in artificial intelligence (AI), an area that it sees as a high priority for customers. For example, AWS created Amazon Bedrock, a service offering companies top foundation models to tailor to their needs -- without working from the ground up or needing to manage infrastructure. Amazon says the number of customers building generative AI apps in AWS "is substantial and growing."
AWS has been Amazon's profit driver over time, so this business' success could be big for the company overall.
3. Valuation remains reasonable
Amazon shares trade for 56x forward earnings estimates right now, which may seem steep. But it's important to keep in mind that they traded for more than 80x forward earnings a couple of years ago -- before Amazon improved its cost structure and launched certain high-potential AI products.
Analysts are predicting double-digit annual growth for the company over the coming five years, another sign that Amazon's earnings could take off from here. All of this means the company's valuation looks pretty reasonable right now considering its long-term prospects.
A reasonable valuation along with further earnings gains and progress from AWS could draw more and more investors to the shares this year -- even after last year's gains. Of course, it's impossible to forecast a stock's path with 100% accuracy. But considering these three points, it's fair to say Amazon has what it takes to potentially explode higher in 2024 -- and even better, score a win for investors over time.
