Amazon's (AMZN 0.41%) stock has turned in extraordinary returns over the years. In the last decade, the share price's 975% gain dwarfed the S&P 500's 167%.
That's been very rewarding for long-term shareholders. It's tempting to hold on, or if you don't own the shares, jump on the bandwagon.
But the stock's past performance tells us nothing about the future. To make an informed decision, investors need to examine Amazon's prospects by conducting a fundamental analysis.
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Slowing cloud computing
Amazon has a dominant cloud-computing business, Amazon Web Services (AWS). This has had fast growth and generates a high-profit margin.
AWS provides cloud-based products to businesses that include database and analytic tools, among other things, which allow them to perform analytics. Sales growth has been slowing, however. AWS' fourth-quarter sales increased a still-respectable 13% to $24.2 billion. A year ago, the top line increased 28%, but that's a hard pace to maintain.
AWS generates the highest profit among Amazon's three segments. Q4 operating income rose 37.7% to $7.2 billion.
AWS continues to have a leading market share, but it has been eroding. It edged down to 31% at the end of 2023, down from 33% a year ago, according to Synergy Research Group. The other major competitors are Microsoft's Azure and Alphabet, which had a 24% and 11% share of the market, respectively.
E-commerce
Many people know Amazon for its online shopping capabilities. And it's a popular way to buy items. In the U.S., e-commerce sales were 15.6% of total Q4 retail sales last year., according to the U.S. Census Bureau. That's up from 14.9% in the year-ago period. If the share grows, Amazon would be in a good position to benefit. After all, it offers low prices and convenient, fast shipping.
But the business doesn't generate a lot of profits. The North American and international segments largely consist of online retail, physical stores, and third-party sellers. North America's Q4 sales grew by 13% to $105.5 billion. This produced $6.5 billion in operating profits compared to a $240 million loss last year. The international business experienced 16.8% sales growth, but it lost $419 million.
These businesses don't just consist of retail operations. For instance, there's the fast-growing advertising business, which had a Q4 sales increase of 26%, to $14.7 billion. With Amazon's huge audience and data, this represents a growth area.
Premium valuation
Amazon's stock sells at a premium to the S&P 500. The shares have a price-to-sales (P/S) ratio of 3.2, while the S&P 500 has a 2.7 sales multiple. A year ago, Amazon's shares had about a 2 P/S ratio.
NASDAQ: AMZN
Key Data Points
Paying a higher multiple means the market expects Amazon's profits to grow quickly. Management anticipates Q1 operating income to grow to between $8 billion and $12 billion, or 67% to 150% on 8% to 13% sales growth.
While the short-term outlook looks sound, what about the longer term? Amazon has a dominant position in e-commerce, and it's rapidly growing the advertising business. But that remains a low-margin business. The highly profitable AWS has seen growth slow, albeit from a torrid pace. But I'm more concerned with the market-share decline, which I'd like to see reversed.
Hence, I'd continue to hold onto Amazon shares while avoiding new purchases until you see tangible evidence that AWS has regained lost ground.
