Amazon has long been a favourite among investors, renowned for its consistent growth and market dominance. As we step into 2024, questions are being raised about whether the tech giant still holds the same appeal.
A Brief Look Back: Amazon’s Rise to Dominance
Founded in 1994 by Jeff Bezos, Amazon started as an online bookstore and rapidly expanded to become the world’s largest online retailer. Over the years, the company has diversified into various sectors, from cloud computing with Amazon Web Services to entertainment through Amazon Prime Video, and even healthcare with its Amazon Pharmacy division.
Amazon’s multi faced business model and continuous innovation have been key to its growth story. The company has achieved remarkable financial performance, growing from a modest start up to a $1.9 trillion behemoth in market capitalisation in 2024.
Financial Performance: A Snapshot
When evaluating Amazon as an investment in 2024, it is crucial to examine its recent financial performance:
Revenue Growth: For the first three quarters of 2023, Amazon reported revenues of $406 billion, a growth of 10% year over year. This is a significant rebound from the slower growth rates experienced in 2022 due to post pandemic normalisation and global economic headwinds.
Profit Margins: The company’s operating income also showed signs of recovery, standing at $12 billion for the same period. While this is an improvement from the previous year, it is worth noting that profit margins remain under pressure due to rising costs, including labour, logistics, and energy expenses.
AWS Performance: AWS, Amazon’s cloud computing division, continues to be a major profit driver. It contributed $65 billion in revenues and accounted for 70% of Amazon's operating income in 2023. Despite some slowdown in growth, AWS remains critical to Amazon's overall profitability and future growth prospects.
Key Factors Influencing Amazon's Future in 2024
1. Continued Growth in E Commerce and Cloud Computing
Amazon’s e-commerce platform remains a global leader, and with the steady rise in online shopping, this segment will likely continue to drive revenue growth. The company has made significant investments in its logistics network, including advanced fulfilment centres and drone delivery services, to enhance its e-commerce capabilities.
Moreover, the growth potential of AWS cannot be overstated. As more businesses shift towards cloud solutions, AWS is positioned to capture a substantial share of this growing market. It currently holds a 32% market share in cloud infrastructure services, well ahead of competitors like Microsoft Azure and Google Cloud. This dominance provides a stable revenue base and the opportunity to explore higher margin services like AI and machine learning.
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2. Expansion into New Markets and Sectors
Amazon has been diversifying beyond its traditional retail and cloud services into areas such as healthcare, grocery, and advertising. The company’s foray into healthcare, marked by its acquisition of One Medical for $3.9 billion, signals its ambition to disrupt the healthcare sector. Similarly, Amazon Fresh and Whole Foods Market are critical components of its strategy to penetrate the grocery market further.
Amazon's digital advertising segment is another growth area, which saw $42 billion in revenue in 2023. Competing with giants like Google and Meta, Amazon's unique position allows it to leverage its vast consumer data for targeted advertising, offering significant upside potential.
3. Challenges from Competition and Regulatory Scrutiny
While Amazon remains a formidable player, it faces increasing competition across all its business segments. In the e-commerce space, Walmart and Alibaba continue to expand their digital offerings. Meanwhile, in cloud computing, Microsoft Azure and Google Cloud are rapidly gaining ground.
Regulatory scrutiny also presents a challenge. Antitrust investigations in the US, Europe, and other markets could result in substantial fines or enforced structural changes that might affect Amazon's growth. Increased regulatory pressures could also lead to higher compliance costs, impacting profitability.
4. Focus on Sustainability and ESG moves
Another factor influencing Amazon's investment potential is its approach to sustainability and environmental, social, and governance issues. The company has pledged to reach net zero carbon emissions by 2040 and is heavily investing in renewable energy and sustainable practices. While these moves align with global trends towards sustainability, they also involve significant costs. Companies with strong ESG credentials are increasingly favoured by investors, which could benefit Amazon in the long term.
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Amazon's Stock Performance: A Volatile Journey
Amazon’s stock has been subject to high volatility over the past two years. After reaching an all time high in 2021, the stock fell significantly in 2022 amidst broader market sell offs and rising interest rates, which affected high growth tech stocks. 2023 has seen a recovery, with Amazon shares gaining nearly 40% from their lows, reflecting renewed investor confidence in its growth prospects.
Despite this rebound, the stock remains sensitive to market conditions, including inflation rates, consumer spending patterns, and changes in investor sentiment towards tech stocks. While Amazon offers growth potential, it is crucial for investors to be mindful of these volatility risks.
Is Amazon Undervalued or Overvalued?
Determining whether Amazon is undervalued or overvalued depends on various factors, including its price to earnings (P/E) ratio, growth expectations, and overall market conditions. As of early 2024, Amazon’s P/E ratio stands at around 60, higher than the average S&P 500 company but lower than some high growth tech peers.
Considering Amazon's growth prospects, market leadership, and ongoing diversification, some analysts argue that the stock still has room to grow. However, others caution that its high valuation leaves little margin for error, especially in an uncertain economic environment.
Is Amazon Still a Strong Investment in 2024?
So, is Amazon still a strong investment in 2024? We believe the answer depends on your investment strategy and risk appetite. Amazon remains a dominant force in multiple sectors, from e-commerce and cloud computing to digital advertising and healthcare. The company’s robust business model, continuous innovation, and diversification efforts position it well for future growth.
Potential investors should also consider the challenges Amazon faces, including intensifying competition, regulatory risks, and potential market volatility. While Amazon could offer substantial returns for those willing to ride out the ups and downs, it is essential to stay informed and be prepared for possible short term fluctuations.
For those with a long term investment horizon, Amazon continues to offer a compelling story of innovation and growth. Still, it's vital to keep a close eye on the company's performance, market dynamics, and emerging risks in 2024 and beyond.
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