With less than a month left in 2023, Amazon (NASDAQ:AMZN) stock is up 71% year-to-date. It’s now 28% away from its June 2021 all-time high of $188.65. Everything seems to go Amazon’s way. Even its $1.4 billion tentative iRobot (NASDAQ:IRBT) acquisition — it’s been in limbo since the deal was first announced in August 2022 — looks to have passed inspection with EU antitrust regulators.
The share price aside, Amazon has a few issues it’s dealing with that aren’t going its way. Buying AMZN stock today when it’s up more than 71% on the year could be a case of buying at the top. Or it might be the beginning of its next leg up. Here are my pros and cons with AMZN stock heading into 2024.
Does AWS Have Staying Power?
A recent Motley Fool article pointed out that Amazon’s services segment (Prime, AWS, advertising) generates 56% of its overall revenue compared to 44% for its e-commerce and brick-and-mortar retail sales.
While its advertising business has gotten significant media coverage in the last couple of years as its revenues have grown significantly. Through the first nine months of 2023, they were $32.3 billion, 23.2% higher than a year earlier.
Historically, it is the AWS cloud business that has driven Amazon’s profitability. Its retail business has never been about profits. It’s been about growing the Amazon Prime ecosystem like Apple (NASDAQ:AAPL) has done.
The only fly in the ointment is the future growth of AWS.
In the first nine months of 2023, they were $66.6 billion, 13.3% higher than a year earlier. In the past three fiscal years, AWS sales grew 29.5% (2020), 37.1% (2021), and 28.8% (2022), respectively.
On an annualized basis, AWS sales in 2023 are projected to be $88.8 billion ($66.6 billion / 3 * 4), an 11% increase over 2022, a big drop from the nearly 29% growth in 2022.
Slowing AWS revenue growth combined with a declining operating margin — it was 26.2% in the first nine months of 2023, down 380 basis points from a year earlier — suggests that Amazon’s not going to be able to rely on its cloud business in the future as much as it has in the past.
That’s a legitimate concern.
The Up-and-Coming Businesses
I already mentioned advertising. The other big one is artificial intelligence (AI).
On the advertising front, its revenue in the first nine months of 2023 was $32.3 billion, 23.3% higher than a year ago. More importantly, a year ago, its ad revenue was even with its subscription services, which includes Prime, but in 2023, its ad revenue was $2.5 billion higher.
Speaking about the ad business, Amazon announced on Dec. 7 that it had signed a three-year deal with IPG Mediabrands. The company will help Amazon launch limited ads on its Prime Video platform for TV shows and movies in 2024.
Remember, it’s all about the Prime ecosystem.
As for AI, it announced Amazon Q on Nov. 28, a chatbot for businesses that will initially cost $20 per user per month. The chatbot will allow users to discuss information from applications like Dropbox, Salesforce, Microsoft 365, and Zendesk.
“We think Q has the potential to become a work companion for millions and millions of people in their work life,” New York Times reported comments by Adam Selipsky, CEO of AWS.
While late to the chatbot party, Amazon has used the delayed entry to determine what businesses were looking for from an AI assistant. It found that enterprises were looking for enhanced security and privacy. Q works off several AI systems held on the Bedrock platform.
Priced at $20, it costs less than both Bard and CoPilot.
The best part is that Q is part of Amazon’s cloud services, which is part of AWS, so maybe its demise is greatly exaggerated.
Is AMZN Stock a Buy?
It’s funny, but I don’t remember the last time I looked closely at the retail part of Amazon’s business. That’s a good thing when it generates nearly $160 billion in annual revenue. It’s the world’s biggest loss leader. Every company should be so lucky.
Fifty-seven analysts cover Amazon stock. Of those, 56 rate it “Overweight” or an outright “Buy,” with a $175 target price, 19% higher than where it’s currently trading.
Despite a 2024 price-to-earnings ratio of 41, analysts love Amazon stock.
For me, gains in advertising will offset any slowdown in AWS. In time, with the development of a comprehensive AI strategy and the rollout of a group of revenue-generating products such as Q, AWS revenue growth should return to 20%+.
You could buy some now and figure out an options strategy to buy some more in the future.
For example, the July 19/2024 $110 put had a $2.34 bid price and a $146.88 share price when I wrote this. If you sell this put, the annualized yield on the premium income should you not have to buy the shares would be 2.6% [$2.34/$146.88 * 365/224 days to expiration], which isn’t all that great.
However, your net price would be $107.66 [$110 – $2.34], lowering your average cost to $127.27 a share. And you didn’t have to put up any money until July 2024 to make that happen.
Just a thought.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
