The stock market has been on a tear over the past year and a half, with the S&P 500 rising by more than 37% since the end of 2022. One standout performer during this period has been Amazon (NASDAQ: AMZN), whose share price has surged by about 110%. But as investors bask in the glow of these gains, the question on everyone’s mind is whether this momentum can continue.
Amazon, known primarily as an online retailer, actually generates the majority of its profits from its cloud-computing segment, Amazon Web Services (AWS). Last year, AWS produced operating income of $24.6 billion, accounting for two-thirds of the company’s total operating income. With a 27.1% operating margin in 2023, AWS far outperformed Amazon’s North American retail segment, which had a margin of only 4%.
Despite its success, AWS faces stiff competition from the likes of Microsoft and Alphabet in the cloud infrastructure space. While AWS still leads the market with a 31% share, its competitors are gaining ground.
In addition to its cloud business, Amazon’s North America and international segments have also seen strong sales growth. The company’s advertising services have been a key driver of revenue growth, with advertisers benefiting from Amazon’s vast online platforms and Prime subscription service.
However, with Amazon’s stock trading at a price-to-earnings ratio of 50, nearly double the S&P 500’s ratio, some investors may be wary of its rich valuation. While AWS has promising long-term prospects, investors should carefully consider whether the stock’s high expectations are already priced in.
In conclusion, while Amazon has been a success story in recent years, its rich valuation may give investors pause. As the market continues to evolve, it will be interesting to see how Amazon navigates the challenges ahead.