Can Amazon stock live up to the hype?

Amazon's stock price, up over 50% in 2023, speaks volumes about its market position and the investor confidence it commands.

But what's steering this bullish sentiment for Amazon?

What’s happening?

  • As 2023 unfolds, shares of Amazon (AMZN) have soared over 50%, outperforming the Nasdaq Composite Index's 29% surge.
  • The stock surged after very well-received second-quarter earnings, the first released under new CEO Andy Jassy.
  • Amazon has benefited from the broader bullish market this year as investors have returned to tech stocks and mega-cap favourites.

Fun Fact:

in the mid-nineties, in Jeff Bezzos’ garage, a bell would ring in the office every time someone made a purchase on Amazon.com.

As the company grew exponentially, the bell obviously had to be turned off, but it's a charming glimpse into the humble beginnings of what is now a global e-commerce giant. Imagine a bell ringing now every time someone orders something on Amazon – it would be nonstop!

Diversifying Beyond E-commerce

Although Amazon's roots lie in e-commerce, it's increasingly leaning into services. Recent data shows that while net product sales witnessed a meager jump from $113 billion to $116 billion in the first half of 2023,

Amazon's services segment is demonstrating a meteoric rise. Driven largely by Amazon Web Services (AWS), the services division swelled from $125 billion to $146 billion through fiscal Q2 2023.

An Uplift in Profitability

The transition towards services has also enhanced Amazon's profitability matrix. In the last quarter, Amazon reported an operating income of $7.7 billion, reversing a previous year's $2 billion loss into a staggering $7 billion profit. CEO Andy Jassy's acknowledgement of this success in an early August press release mirrors the company's bullish outlook.

Amazon's renewed emphasis on free cash flow further cements the narrative. Following a dip in early 2022, the company registered a positive swing, clocking in an $8 billion cash inflow this recent quarter.

Stock Price Uncertainties

Stock price movements, particularly for a company as vast as Amazon, can be influenced by various factors – from macroeconomic indicators to shifting investor sentiments. 

While Amazon's march towards improved profitability hints at sustained growth, its relatively lower profitability compared to tech giants like Microsoft and Apple might be a concern for some. Yet, the bullish perspective emphasizes Amazon's growing margins and cash flow, indicating robust returns extending through 2023.

The share price has paused for a second time after exceeding its 200-day moving average and the $145 level. A rise over this area could see the price re-test the record-high at $188, whereas another failure could set up another pullback towards $100.

Source: TradingView

Amazon's Efficiency Drive

Like other big-name companies on the rise this year, including Facebook, some of the optimism stems from Amazon's improved order fulfilment efficiency, evident from insights gathered during Amazon’s early August conference call.

This efficiency drive is particularly important for Amazon. Over the past year, tech giants, including Amazon, have sought to optimize costs and streamline operations. With significant investments in warehouse automation robotics, Amazon is poised to boost its operational efficiency, potentially leading to even faster delivery times.

Wedbush’s addition of Amazon to its “Best Ideas List” further supports this optimism, forecasting a potential 35% stock price surge.

Amazon's AI Foray

Amazon is not one to be left behind in the AI race. Besides introducing AI services like Code Whisperer and Bedrock AI, Amazon's interest in AI start-up ‘Hugging Face’ underscores its commitment to harnessing AI’s potential. Valued at approximately $4.5 billion, Hugging Face is perceived as the GitHub for the AI era. The success and integration of such ventures will certainly shape Amazon’s future growth trajectory.

Analyst Predictions for Amazon

The predominant sentiment among analysts is bullish. With 40 out of 41 rating Amazon as a 'Buy', the average stock price target hovers around $175.63, indicating a promising 31.9% upside. The range of predictions spans from a conservative $140 per share to an ambitious $230.

Source: Tiprank

Final Thoughts

The confluence of efficient operations, a push towards services, and pioneering AI initiatives position Amazon as a formidable force in the tech sector. While the stock might seem overvalued based on traditional metrics, its growth trajectory and expansive potential keep it popular among analysts.