Amazon (NASDAQ: AMZN) has grown into a massive company that generated about $575 billion in revenue last year. Unlike its early days when it recorded losses, it’s highly profitable, with nearly $37 billion in operating income.
Shareholders have been handsomely rewarded throughout the year. Most recently, it’s part of the “Magnificent Seven,” a group of large-capitalization stocks with familiar names like Apple and Nvidia. With strong market positions, these well-known companies drew a lot of investor interest.
But past success doesn’t guarantee future results, of course. While no one has a crystal ball, diving into Amazon’s fundamentals will help you determine what course of action you should take.
Image source: Getty Images.
Cloud-computing leader
Many people associate Amazon with its retail operations. But the company’s cloud-computing business, Amazon Web Services (AWS), actually generates most of the company’s profit despite accounting for 18% of the sales.
During the first half of the year, AWS represented 63% of Amazon’s operating income. It also generates a much higher operating margin, 36.5%, than the North American and international segments, which had a 5.7% and 1.8% margin, respectively.
It’s not a slow-growth, highly profitable business, either. AWS continues to grow sales at a good rate, including 18% this year. With companies continuing to clamor for data, and artificial intelligence (AI) adding to growth, the business also remains well positioned for the future. Notably, AI, in its early days, has the potential to accelerate AWS’ growth.
A bigger business doesn’t necessarily translate into greater profitability. However, size conveys certain advantages in this business. That includes having the resources to maintain large data centers, along with economies of scale.
On this front, AWS stands ahead of the competition. It had a leading 31% market share as of the first quarter, followed by Microsoft‘s Azure (25%) and Alphabet‘s Google Cloud’s 11%. The smaller competitors have under a 5% share of the market.
Other businesses
Although not as profitable, Amazon’s other two segments grew this year. The North American and international segments saw revenue increases of 10.6% and 8.1%, respectively, during the first half of the year.
These businesses include online sales, Amazon Prime subscriptions, and advertising. While advertising sales can fluctuate depending on the economic cycle, Amazon’s huge number of users offer tangible benefits to advertisers. Hence, it remains a strong growth area, since the company draws huge numbers of people to its site along with its popular subscription services.
Advertising revenue has grown by at least 20% for several quarters. That includes a 20% increase in the second quarter.
Subscription services, which include the popular Prime membership that offers a streaming service and free shipping to online buyers, continue growing at a nice clip. While easy, fast, convenient shopping with access to special deals is the main draw, you also get a streaming service. In the latest quarter, subscription services’ top line increased 10%.
Richer valuation
Amazon’s success hasn’t been lost on investors. Its share price gained 34% over the last year. That bested the S&P 500‘s 28% advance.
That has also translated into a more expensive valuation. During this time, the stock’s price-to-sales (P/S) ratio increased from 2.6 to 3.1. The shares sell at a higher valuation than the overall stock market, with the S&P 500′s P/S multiple standing at 2.9.
Hence, with Amazon’s shares selling at a premium to the S&P 500, it’s hard to call the shares cheap. However, the richer valuation seems justified by the business’ long-term growth prospects, particularly its main profit generator, AWS.
But for investors concerned about the valuation, you can use dollar-cost averaging. That way, you make the same dollar amounts at regular intervals. That’ll smooth out your purchase prices, and you’ll accumulate shares in this growing company over time.
Should you invest $1,000 in Amazon right now?
Before you buy stock in Amazon, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Amazon wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $779,735!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
See the 10 stocks »
*Stock Advisor returns as of August 12, 2024
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.