Amazon is Growing Earnings at a Freakish Pace
The world’s leading e-commerce and web services platform, Amazon AMZN reports earnings Thursday, October 26 after the market closes.
Amazon stock has put up a strong performance so far in 2023, up 51.1% YTD. However, it should be noted that AMZN stock has languished over the last three years, losing -21% over that period, and underperforming the broad market.
For discerning investors this should be looked at as an opportunity. Although the stock is down over that period, annual sales have climbed nearly 40%, cloud services has maintained its dominant industry position, and new high margin businesses like Amazon ads have exploded from seemingly nowhere.
That means the business has grown deeper and wider over that time, while the relative valuation has eased significantly. Furthermore, and most notably, Amazon is projected to grow its EPS faster than any other Mega Cap technology stock over the next 3-5 years.
Image Source: Zacks Investment Research
Earnings Estimates
Earnings estimates have trended higher for most of 2023, although in the last two months they have been unchanged. This gives Amazon a Zacks Rank #3 (Hold), reflecting a mixed earnings revision trend.
Nonetheless, sales and earnings are expected to grow at a healthy pace despite the mixed macroeconomic environment. Current quarter sales are forecast to grow 11.4% YoY to $141.65 billion and earnings are projected to climb 190% to $0.58 per share.
Image Source: Zacks Investment Research
Most impressive is its EPS forecasts, which expect Amazon to see earnings grow an average of 29.5% annually over the next 3-5 years. These projections dwarf the expectation of its mega cap tech counterparts, most of which expect growth under 20%. Not that those are anything to balk at, but the figures from Amazon are especially impressive.
Image Source: Zacks Investment Research
Ads Sales Surging
One of the key drivers of sales growth, and the fastest growing segment at Amazon is its relatively new business Amazon Ads. Amazon has quickly grown to be the third largest digital ad platform in the world, behind only Meta Platforms META and Alphabet GOOGL.
The advertising business is expected to bring in $45 billion this year, which is up 21% since last year and more than double since 2020. That is especially compelling because both Meta Platforms and Alphabet have struggled in the last year.
Additionally, since 2020 Amazon has increased its market share in the digital ad space from 10.3% to 13%. In comparison, Alphabet and Meta Platforms had shares of 28.9% and 25.2%, respectively.
Web Services
One of the more impressive feats from Amazon over the last few years is its ability to maintain such a dominant position in the cloud services industry. In what is one of the most competitive, fastest growing, and high margin big businesses in the world, AMZN continues to draw in new customers and hold on to current ones.
Today, Amazon owns a third of the half a trillion-dollar cloud services market, well above competitors Microsoft MSFT (23%) and Alphabet (10%). Although Amazon owns the largest market share in cloud computing, it is also the slowest growing. Last quarter AWS grew sales 12% YoY, while Microsoft grew them 15%, and Alphabet 28% YoY.
Image Source: Statista
Valuation
As noted earlier, because of the lackluster three-year performance of AMZN stock, its earnings multiple has fallen off its highs and is well below its historic median.
Today it is trading at a one year forward earnings multiple of 56.7x, below the 10-year median of 113x, and very near its low of 50.5x. And this is all right as its earnings begin a period of acceleration.
Image Source: Zacks Investment Research
Bottom Line
Amazon is by far one the best performing stocks in the market, as well as the broadest and most solid business model out there. Its stock has compounded at 21% annually over the last 25 years adding up to a cumulative return of 12,000%.
The company continues to execute at the highest level – entering new markets like ads, controlling cloud services and e-commerce, and will dramatically boost profits in the near future. Because of this I think Amazon is an extremely convincing investment, whether you buy it before or after earnings.
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