The stock market’s gains in the past year and a half have left many investors smiling. Since the end of 2022, the S&P 500 has risen by more than 37%. But that also puts investors in a difficult spot as they try to figure out whether this momentum will continue.
For example, Amazon (AMZN -0.38%) has been a standout performer, with the share price rising about 110% during this span. Have investors gotten too carried away in terms of how they’re valuing the stock? While it’s fun to talk about stock prices, getting a grip on Amazon’s business, prospects, and valuation will help you determine whether or not you should buy the stock now.
Image source: Getty Images.
Growing its key business
Many people think of Amazon largely as an online retailer — though it has brick-and-mortar stores too. But the company generates the majority of its profits from its cloud-computing segment, Amazon Web Services (AWS).
Last year, AWS produced operating income of $24.6 billion — two-thirds of the company’s total operating income. Moreover, AWS’ 27.1% operating margin in 2023 was much higher than the roughly 4% margin generated by its North American retail segment. And its international retail segment didn’t produce a profit last year.
AWS’ revenue growth remains strong. In the first quarter, the segment’s top line increased by 17% year over year to $25 billion. Its size conveys certain advantages, including the ability to build and maintain data centers. And AWS benefits from entities increasingly relying on massive quantities of data. According to Statista, in Q1, global cloud spending increased to $76 billion. And according to Synergy Research Group, the cloud market is growing at 21% annually.
Amid this good news, there is a potential issue investors should keep an eye on. AWS continued to lead the cloud infrastructure space in Q1 with a 31% market share, but that was down by 1 percentage point from a year earlier. Its two largest competitors, Microsoft and Alphabet, had market shares of 25% and 11%, respectively.
Other businesses
Amazon’s North America and international segments continued to produce nice sales growth. In Q1, the North America segment had a 12% top-line increase while international’s growth was 11% (both figures excluding the impact of foreign currency exchange fluctuations).
Profitability improved significantly, which management credited to higher unit sales and advertising revenue. The North America segment’s operating income was $5 billion versus $898 million in the prior-year period, and international flipped to a $903 million profit from a $1.2 billion loss.
Advertising services remain a strong growth driver. Revenue from that source has been growing at better than 20% for several straight quarters, including 24% in the latest period. Thanks to the vast reach of Amazon’s online platforms and Prime subscription service, advertisers buying space from it can target specific audiences. Its ad business has the potential to continue growing into a major profit center down the line.
Richly valued
With all of Amazon’s success, its long-term investors have been richly rewarded — and as a result, the shares aren’t cheap. The stock trades at a price-to-earnings (P/E) ratio of 50, nearly double the S&P 500‘s ratio of 27.
That’s not necessarily bad. But it does mean that the market has already priced in high expectations for continued growth. Any slowdown in that expansion will likely take a toll on the share price as the P/E multiple contracts.
Things have been going well for Amazon, and AWS has good long-term prospects. But I’d pass on buying additional shares of the company right now, given its rich valuation.
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, and Microsoft. 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.