Amazon will sell an immense amount of goods this week. But the $2 trillion question is how profitably the company can sell other services.
This year's Prime Day, Amazon's invented holiday, begins on July 16 and comes at a time when the tech giant's investors already have reason to celebrate. Revitalized revenue growth and an even more robust improvement in the bottom line have caused the company's stock to continuously rise over the past year and a half, pushing the share price to a record high and the company's market capitalization to exceed the 2-trillion-dollar mark.
The hype around Artificial Intelligence (AI) was undoubtedly a factor in this performance: The stocks of Amazon, Microsoft, Apple, Alphabet, and Facebook parent Meta Platforms have grown by an average of 44% over the past year, while Nvidia's stock price has nearly tripled during this period. These six companies account for more than 31% of the total market capitalization of the S&P 500; considering this, the S&P 500 Equal Weight Index has risen by just over 10% in the past year.
However, for Amazon, the journey was more of a comeback.
Investors are now essentially betting that the company will not return to 'investment mode.' Amazon's operating income has increased by triple-digit percentages over the past four quarters and is expected to reach more than $62 billion this year, according to consensus forecasts from FactSet. This would correspond to an annual operating margin of nearly 10%, compared to the 5% Amazon has averaged over the past five years. According to current FactSet estimates, Amazon's operating margin is expected to remain in double digits and continue to expand at least through 2027.
This will require much more than just a successful Prime Day. This year's event is expected to bring Amazon about 13.3 billion USD in global sales, according to Emarketer, which represents a 6% increase compared to last year. While the company has stabilized its retail profits, its advertising and cloud businesses contribute significantly more to the bottom line. Both are showing strong momentum, with the demand for cloud computing services and the emerging AI market expected to drive AWS cloud revenue up by nearly 18% this year, compared to 13% growth last year.
Advertising is a $49 Billion Business for Amazon and is Expected to be Further Strengthened by the Introduction of Ads in the Prime Video Streaming Service.
A market capitalization of $2 trillion would elevate all these efforts to a high level. However, Amazon's rapidly growing profit margin has actually made its valuation seem less crazy. The stock is now trading at less than 40 times the projected earnings for the next four quarters, compared to a multiple of 67 when the company's market capitalization first surpassed the $1 trillion mark in early 2020, according to FactSet data. Amazon continues to trade at a premium compared to Microsoft, Apple, and Google-parent Alphabet, but this gap has significantly narrowed as the company's profits have improved. At $2 trillion, the Everything Store has rarely been so cheap.
