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Can Cloud Momentum Drive Amazon's Stock Beyond Its 14.1% YTD Gain?
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Buoyed by cloud dominance, Amazon (AMZN - Free Report) shares have gained 14.1% in the year-to-date period, outperforming the industry’s return of 11.2%. The company is also outperforming two other major cloud behemoths — Microsoft (MSFT - Free Report) and Alphabet’s (GOOGL - Free Report) Google, which have returned 8.7% and 12%, respectively, in the same time frame.
In second-quarter 2024, AMZN’s cloud-computing arm — Amazon Web Services (“AWS”) — generated revenues of $26.3 billion (18% of net sales), which rose 19% year over year.
Per Canalys data, AWS accounted for 33% of the total cloud spending in the same quarter, while Microsoft and Google accounted for 20% and 10%, respectively.
Amazon has been at the forefront of the AI revolution, making significant strides in strengthening its Generative AI (GenAI) capabilities. This, in turn, is strengthening its cloud-computing solutions.
However, the AMZN stock has underperformed the S&P 500 index’s rally of 15.9% year to date. Although Amazon is considered the e-commerce giant due to its solid Prime momentum Prime, growing relationships with third-party sellers and strong online store offerings, foreign exchange headwinds and changing consumer spending patterns are concerning for the company’s online retail business.
Given these hurdles in the e-commerce space, the most crucial question is whether Amazon's cloud momentum will drive the stock.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
AWS Portfolio Strength: A Key Catalyst for AMZN Stock
AWS’s concerted efforts toward strengthening service offerings remain crucial in sustaining its dominance in the booming cloud market.
It recently unveiled a GenAI-powered service called AWS App Studio, which helps create enterprise-grade applications by leveraging natural language. It simplifies and fastens the process of developing an application from scratch.
The company announced the general availability of its new managed service called AWS Parallel Computing Service, which enables customers to build scientific and engineering models and seamlessly manage high-performance computing infrastructure.
Its introduction of AWS Graviton4-based compute instances, which offer up to 30% better price performance than the industry-leading AWS Graviton3 instances, remains noteworthy.
AWS’s deepening focus on innovating Amazon Bedrock, which has provided it with a breakthrough in the GenAI space, is a major positive. The unveiling of Bedrock features like custom model import capability and model evaluation capabilities, and Guardrails, which are designed to provide customers a secure, easy and fast way to develop advanced GenAI applications, is a plus.
The company’s GenAI offerings include a smart assistant called Amazon Q, which generates codes, tests and debugs, and has multi-step planning and reasoning capabilities.
Apart from robust cloud solutions, Amazon’s expanding network of infrastructure regions is another positive. It recently launched AWS Asia Pacific (Malaysia) Region. With this move, AWS now has 108 Availability Zones across 34 geographic regions, with announced plans to launch 18 more Availability Zones and six more AWS Regions in Mexico, New Zealand, the Kingdom of Saudi Arabia, Taiwan, Thailand, and the AWS European Sovereign Cloud.
AWS’s Strong Clientele Drives Amazon’s Growth
Strong GenAI capabilities, coupled with AWS’s other robust cloud solutions, expanding data center network, and an increasing number of infrastructure regions and Availability Zones, are bolstering its customer base.
Recently, AWS was selected by the Central Japan Railway Company. The latter is using AWS's Internet of Things, machine learning (ML) and GenAI capabilities to drive efficient operations for its next-generation, high-speed train service.
A global gold producer named Gold Fields shifted its end-to-end SAP and treasury systems to AWS. Gold Fields is also leveraging AWS’s analytics, ML and GenAI solutions to modernize technology infrastructure.
Accenture (ACN - Free Report) joined forces with AWS to develop the Accenture Responsible Artificial Intelligence platform. Accenture leverages AWS’s AI services, including Amazon Bedrock and Amazon SageMaker, along with AWS Control Tower, Amazon DataZone and AWS observability tools.
Infor, a leading provider of a global leader in business cloud software, recently selected Amazon Bedrock to deploy GenAI solutions embedded within Infor CloudSuite.
AWS was picked by Iberdrola and PolyAI as their preferred cloud provider.
Robin AI teamed up with AWS to power its legal assistant by using Amazon Bedrock and Amazon SageMaker.
GE HealthCare (GEHC - Free Report) selected AWS as its strategic cloud provider to accelerate healthcare transformation with GenAI. GEHC intends to utilize AWS’s ML and GenAI capabilities for this purpose.
The collaboration of Exscientia with AWS remains noteworthy. The former is expanding the use of AWS’s AI and ML services to accelerate early drug development at a lower cost.
AMZN’s Rising Estimates Paint Bright Picture
AWS’s expanding customer base on the back of solid portfolio strength is expected to aid its long-term prospects.
The Zacks Consensus Estimate for 2024 revenues is pegged at $634.49 billion, which indicates a year-over-year increase of 10.4%.
The consensus mark for 2024 earnings stands at $4.74 per share, indicating year-over-year growth of 63.5%. The estimate has moved north by a penny over the past 30 days.
Image Source: Zacks Investment Research
Amazon Faces Challenges & Offers Lofty Valuation
Although Amazon's cloud prospects and AI initiatives are positives, broader market concerns, macroeconomic uncertainties, geo-political tensions and intensifying cloud competition are major concerns, which make its near-term prospects foggy.
The looming regulatory scrutiny adds an element of uncertainty to the AMZN stock’s AI-driven growth prospects.
Additionally, the hurdles Amazon is facing in its e-commerce business do not bode well.
AMZN is trading at a premium with a forward 12-month Price/Sales of 2.67X compared with the industry’s 1.73X, reflecting a stretched valuation at this moment.
Image Source: Zacks Investment Research
Conclusion
Amazon’s solid AWS momentum and rising earnings estimates present a compelling investment opportunity.
Macro headwinds surrounding the company’s prospects, along with challenges of changing consumer spending patterns in its online retail business, which contributes the most to its total revenues, are concerning.
Hence, investors should be mindful of these challenges. Maintaining a position in this Zacks Rank #3 (Hold) stock appears prudent at present. New investors should, however, wait for a better entry point for Amazon.
Image: Bigstock
Can Cloud Momentum Drive Amazon's Stock Beyond Its 14.1% YTD Gain?
Buoyed by cloud dominance, Amazon (AMZN - Free Report) shares have gained 14.1% in the year-to-date period, outperforming the industry’s return of 11.2%. The company is also outperforming two other major cloud behemoths — Microsoft (MSFT - Free Report) and Alphabet’s (GOOGL - Free Report) Google, which have returned 8.7% and 12%, respectively, in the same time frame.
In second-quarter 2024, AMZN’s cloud-computing arm — Amazon Web Services (“AWS”) — generated revenues of $26.3 billion (18% of net sales), which rose 19% year over year.
Per Canalys data, AWS accounted for 33% of the total cloud spending in the same quarter, while Microsoft and Google accounted for 20% and 10%, respectively.
Amazon has been at the forefront of the AI revolution, making significant strides in strengthening its Generative AI (GenAI) capabilities. This, in turn, is strengthening its cloud-computing solutions.
However, the AMZN stock has underperformed the S&P 500 index’s rally of 15.9% year to date. Although Amazon is considered the e-commerce giant due to its solid Prime momentum Prime, growing relationships with third-party sellers and strong online store offerings, foreign exchange headwinds and changing consumer spending patterns are concerning for the company’s online retail business.
Given these hurdles in the e-commerce space, the most crucial question is whether Amazon's cloud momentum will drive the stock.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
AWS Portfolio Strength: A Key Catalyst for AMZN Stock
AWS’s concerted efforts toward strengthening service offerings remain crucial in sustaining its dominance in the booming cloud market.
It recently unveiled a GenAI-powered service called AWS App Studio, which helps create enterprise-grade applications by leveraging natural language. It simplifies and fastens the process of developing an application from scratch.
The company announced the general availability of its new managed service called AWS Parallel Computing Service, which enables customers to build scientific and engineering models and seamlessly manage high-performance computing infrastructure.
Its introduction of AWS Graviton4-based compute instances, which offer up to 30% better price performance than the industry-leading AWS Graviton3 instances, remains noteworthy.
AWS’s deepening focus on innovating Amazon Bedrock, which has provided it with a breakthrough in the GenAI space, is a major positive. The unveiling of Bedrock features like custom model import capability and model evaluation capabilities, and Guardrails, which are designed to provide customers a secure, easy and fast way to develop advanced GenAI applications, is a plus.
The company’s GenAI offerings include a smart assistant called Amazon Q, which generates codes, tests and debugs, and has multi-step planning and reasoning capabilities.
Apart from robust cloud solutions, Amazon’s expanding network of infrastructure regions is another positive. It recently launched AWS Asia Pacific (Malaysia) Region. With this move, AWS now has 108 Availability Zones across 34 geographic regions, with announced plans to launch 18 more Availability Zones and six more AWS Regions in Mexico, New Zealand, the Kingdom of Saudi Arabia, Taiwan, Thailand, and the AWS European Sovereign Cloud.
AWS’s Strong Clientele Drives Amazon’s Growth
Strong GenAI capabilities, coupled with AWS’s other robust cloud solutions, expanding data center network, and an increasing number of infrastructure regions and Availability Zones, are bolstering its customer base.
Recently, AWS was selected by the Central Japan Railway Company. The latter is using AWS's Internet of Things, machine learning (ML) and GenAI capabilities to drive efficient operations for its next-generation, high-speed train service.
A global gold producer named Gold Fields shifted its end-to-end SAP and treasury systems to AWS. Gold Fields is also leveraging AWS’s analytics, ML and GenAI solutions to modernize technology infrastructure.
Accenture (ACN - Free Report) joined forces with AWS to develop the Accenture Responsible Artificial Intelligence platform. Accenture leverages AWS’s AI services, including Amazon Bedrock and Amazon SageMaker, along with AWS Control Tower, Amazon DataZone and AWS observability tools.
Infor, a leading provider of a global leader in business cloud software, recently selected Amazon Bedrock to deploy GenAI solutions embedded within Infor CloudSuite.
AWS was picked by Iberdrola and PolyAI as their preferred cloud provider.
Robin AI teamed up with AWS to power its legal assistant by using Amazon Bedrock and Amazon SageMaker.
GE HealthCare (GEHC - Free Report) selected AWS as its strategic cloud provider to accelerate healthcare transformation with GenAI. GEHC intends to utilize AWS’s ML and GenAI capabilities for this purpose.
The collaboration of Exscientia with AWS remains noteworthy. The former is expanding the use of AWS’s AI and ML services to accelerate early drug development at a lower cost.
AMZN’s Rising Estimates Paint Bright Picture
AWS’s expanding customer base on the back of solid portfolio strength is expected to aid its long-term prospects.
The Zacks Consensus Estimate for 2024 revenues is pegged at $634.49 billion, which indicates a year-over-year increase of 10.4%.
The consensus mark for 2024 earnings stands at $4.74 per share, indicating year-over-year growth of 63.5%. The estimate has moved north by a penny over the past 30 days.
Image Source: Zacks Investment Research
Amazon Faces Challenges & Offers Lofty Valuation
Although Amazon's cloud prospects and AI initiatives are positives, broader market concerns, macroeconomic uncertainties, geo-political tensions and intensifying cloud competition are major concerns, which make its near-term prospects foggy.
The looming regulatory scrutiny adds an element of uncertainty to the AMZN stock’s AI-driven growth prospects.
Additionally, the hurdles Amazon is facing in its e-commerce business do not bode well.
AMZN is trading at a premium with a forward 12-month Price/Sales of 2.67X compared with the industry’s 1.73X, reflecting a stretched valuation at this moment.
Image Source: Zacks Investment Research
Conclusion
Amazon’s solid AWS momentum and rising earnings estimates present a compelling investment opportunity.
Macro headwinds surrounding the company’s prospects, along with challenges of changing consumer spending patterns in its online retail business, which contributes the most to its total revenues, are concerning.
Hence, investors should be mindful of these challenges. Maintaining a position in this Zacks Rank #3 (Hold) stock appears prudent at present. New investors should, however, wait for a better entry point for Amazon.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.