Amazon (NASDAQ:AMZN, Financial), one of the most successful e-commerce and cloud computing companies and a technological giant remains on the rise. Its stock price has increased by about 44.5% over the past year and a whopping 134.8% over the past five years. The company further continues to defy economic risks by delivering outstanding performance. In just the third-quarter of 2024, it achieved a phenomenal revenue increase, a significant improvement in operating income, Amazon Web Services (AWS) cloud market dominance, and its noteworthy Project Kuiper.
Even though the valuation multiples of the company are rather high, the fact that it has consistent profitability, solid cash flow, and a leading position in the various segments of the market supports the premium. Also, the company still maintains a strong argument in terms of investment prospects for anyone interested in steady growth.
Furthermore, given the increase in the stock price, solid margin growth, and the projected decrease in the P/E ratio, I would give it a rather conservative 12-month price target of $250, or 15% above the current price of 217.67. The upside, although solid, seems to be more realistic due to the current high valuation as well as the already significantly boosted share price of the company.
Amazon Q3 2024: A quarter filled with exceptional growth and profitability
Amazon's Q3 2024 results reveal a story of a firm that is beating all odds and positioning itself for continued success. It's a performance worth taking a second look at, not only because of the numbers but because of what those numbers suggest about Amazon's capacity to innovate and deliver.For the quarter, the company reported total revenue of $158.9 billion, up 11% year-over-year (YOY), well above the company's guidance range, with North America (Amazon's largest revenue market) contributing 60% of net sales, AWS 23%, and International 17%.
Source: Amazon's Q3 2024 Financial Results Conference Call Presentation
Amazon also topped analysts' profit estimates, with the operating income rising by 56% YOY to $17.4 billion. In other words, for every $9 of operating profit last year, Amazon has delivered $14 this year. This is the working of precision and efficiency at the largest possible scale. Similarly, net income was up at $15.3 billion and $1.43 per diluted share, from $9.9 billion for the same period last year.
Additionally, North America reported revenue of $95.5 billion, 9% up YOY, while the operating income rocketed by 31% with over 100 bps of operating margin improvement. International operations attracted attention, turning its initial rate of $0.1 billion loss into $1.3 billion profit, demonstrating Amazon's ability to successfully extend its logistics playbook globally. Next, there is AWS, the crown jewel, whose sales grew 19% and operating profit 50% to achieve an unprecedented 37.8% operating margin.
Positive momentum ahead in Q4 and beyond
For Q4, the company expects to generate net sales ranging from $181.5 billion to $188.5 billion, which is up to 11% YOY. Thus, operating income is also projected to increase even more to $20 billion, which also reflects Amazon's operational strength. As for balance, the company completed the third quarter with $88 billion against $54.9 billion of debt, which strengthened the company's position as a stable investment amid turbulence.With sustained efficiency gains in e-commerce and AWS growth, Amazon remains well-placed to generate steady returns for shareholders. This is perfectly captured by its Q3 results and Q4 forecast, proving that it's a tech giant with its guns blazing.
Nine-month momentum: A cash-flow giant in the making
While Amazon's latest quarter segment performance has been stated above, its performance for the first nine months of 2024 is worth a closer look. This reasserts its sound leadership in e-commerce and cloud-computing sectors, coupled with an excellent capacity to generate cash flows. Reporting total North American revenues of $271.9 billion and International revenues of $99.5 billion in this period, the company has demonstrated not just growth, but a return to record-level profitability. North America and International segments' operating income margins improved to 5.8% and 2.5% respectively, which are historical highs since 2018.Moreover, AWS generated $78.8 billion in revenue for the first three quarters, as cloud services demand is increasing rapidly in the market led by generative AI. Holding a 31% market share and enjoying an operating margin of 37.1%, AWS continues to dominate the cloud, although competition from Microsoft's (NASDAQ:MSFT, Financial) Azure is increasing.
What is apparent, however, is Amazon's propensity to turn profitability into cash flow, which makes it so much more real than the profit on the balance sheet. The company recorded over $70.2 billion as operating cash flow, funding $56.9 billion for investments, mainly in technology infrastructure to support AWS. This cash-flow competence guarantees that Amazon continues to invest in its future while strengthening its monopoly for further expansion in 2025 and beyond.
Amazon's game-changer project in global satellite broadband
Now let's move forward from the numbers as Amazon is not only crafting great financial statements but is also making incredible plans to reshape the connectivity of the world via Project Kuiper. The project is to launch over 3,000 satellites to provide an affordable, high-speed internet connection to the less served areas. The satellite broadband segment is expected to grow to $61 billion by 2030. Also, Amazon plans to capture 25-35% of this market, meaning it will be making between $25-$34 billion by 2035.Apart from this, what made Project Kuiper interesting is that Amazon is now famous for its logistics, technology, and particularly its smart bundling capabilities. This can lead to a new kind of competitive advantage when satellite Internet is complemented by such services as AWS, Prime, and e-commerce, which will create demand for the service in progressively higher numbers.
If Project Kuiper delivers on the proposed plan, the firm will clock serious progress and shake up the satellite broadband market alongside Starlink. It remains a large opportunity even with the kind of risks because the net present value (NPV) has been forecasted to be at $57 billion by the year 2025.
Upside potential despite premium valuation
While the current price of Amazon has already seen a material increase, its positive outlook has also risen due to its growing profitability, successful investment activities, and leadership in two very large and growing fields with much more potential yet to be realized. Therefore, the stock is still fairly priced at around $43 times the forward P/E ratio.Relative to competing sectors, such ratios as the forward price-to-sales at 3.66 times, and the forward price-to-book at 8.45 times, are still considerably higher than the median of 0.93 and 2.66 respectively, but Amazon's consistent profitability effectively justifies the premium. Also, the price-to-cash-flow ratio of 19.02 times presents good operational cash generation as compared to the other peers. Apparently, investors now pay more attention to and value the stock more for its increasing margins and operational stability than focusing only on growth rates.
Source: Author Generated Based on Historical Data
When digging in deeper, one of the more attractive aspects of the forward P/E ratio given above is its trend of a steady decrease in multiple. The 2023 actual P/E ratio is at 76.6 times, which is expected to decline by nearly threefold to an estimated 24.4 times by 2027. This sharp contraction is good evidence that Amazon has been improving its ability to generate profits and increase its operational efficiency. Any such trajectory signifies the fundamental fact that this stock is most likely fairly valued for even long-term investors who are looking for stable returns.
Source: AMZN Price/Earnings (P/E) Ratio (Seeking Alpha)
As for other analysts price targets, they have assigned a 12-month average price target of $241.49 for the company, or 10.94% higher than the current price. On the higher side, it is expected to be $290, which actually shows a good sign for its growth. However, the low-end figure of $180 as the target is a decrease of about 17.62%. This disparity highlights a crucial point. While Amazons contingent entry point is less favorable than in the past, there is still an opportunity for upside.
Risks
While having a bright outlook, various opportunities in the future, and superb performance, Amazon does not remain invulnerable to threats. Competition still persists in the cloud segment because Microsoft is actively strengthening the market share of Azure through new services and partnerships, which can put pressure on AWS to stimulate further growth and maintain good margins.Furthermore, Project Kuiper is ambitious and promising yet it provides certain risks as well. Increased costs may stem from regulatory issues and approval which may slow down the process. Another complexity arises from the manufacturing of more than 3000 satellites, and the multiple launches involved. These factors make it useful to keep an eye on how Amazon deals with these issues as they may influence the company's future growth narrative.
Lastly, perhaps the greatest vulnerability of the strategy is that Amazon is trading at such a premium to the market that it cannot afford any error. If Amazon does not meet the growth projections, the stock will likely be under a lot of pressure. This valuation risk should be compared to the company's future growth and earning potential while accepting short-term fluctuations.
Final Word
Amazon continues to deliver. Pronounced in e-commerce and cloud computing, it goes for breakthroughs in such projects as Project Kuiper and remains a leader in pace-setting technological and market developments. Its Q3 2024 results are impressive and reflect remarkable YOY revenue growth, record operating income, and peak profitability, which proves its operational capacity and the potential for international expansion.In the long term, its potential is visible as Amazon is dominant in AWS, and has grand projects going on. While it is trading at a relatively high multiple, Amazon's consistently well execution and position as the market leader reinforce investors' hope. It is for this reason that I have given a one-year target of $250 for the stock which should be viewed as a conservative estimate of the company's growth prospects for those who seek a more stable upside.
Even though, threats such as accelerated cloud competition, regulatory objections, as well as risks to Project Kuiper execution remain, Amazon's double-digit growth across segments shows that it is indeed valuable. To long-term investors, Amazon is not merely the epitome of stability, but progress, effective strategy, and potential for consistent profitability.
This content was originally published on Gurufocus.com
