Summary
Amazon's shares have increased by about 50% since the start of the year.
It has maintained leading market share in e-commerce and cloud, two secular growth trends with plenty of tread left.
Shares are attractively valued for continued accumulation, though one can never know what the market will do as earnings approach.
HJBC
Shares of cloud and e-commerce leader Amazon $Amazon.com(AMZN)$ have soared more than 50% since the beginning of the year.
Such large price swings, especially for a stock as large as Amazon, aren't common, but many stocks are emerging from an uncommonly brutal bear market for growth and technology stocks in 2022.
But we're here to look forward. I wouldn't blame investors who bought low for selling and taking a nice profit. There's a good chance this rally needs a correction to balance things out, and Amazon could easily give some gains back.
However, the bigger picture appears that Amazon's rally is no fluke. The business is healthy, growing, and the stock remains attractively valued.
Let's dive in.
Amazon's leadership in e-commerce and the cloud is secure
Some may argue that Amazon's hefty investments in its business, especially in the e-commerce segment, indicate a poor low-quality company. But I would say that it's a feature and not a bug.
Retail could be the most fragmented spending category in the economy. It's steadily moving into digital channels, and Amazon has managed to capture nearly 40% of that.
U.S. retail e-commerce sales, by company 2022 (Insider Intelligence)
It's a feat that Amazon accomplished by spending billions of dollars over a decade to build the infrastructure to service such a large market. It puts Amazon so far ahead of competitors that it's difficult to see anyone challenging Amazon in the United States. Shopify $Shopify(SHOP)$ wanted to compete with Amazon's logistics and gave up within a year.
The same could be argued for Amazon's cloud business. Amazon has hovered around 33% of global market share for some time now. As the top platform, you're the hunted. However, Amazon still seems to be in a position of power.
Microsoft $Microsoft(MSFT)$ closely guards its Azure financials, lumping them into a broader segment it calls Intelligent Cloud. However, temporarily leaked court documents showed Azure was doing less revenue than many analysts had expected. Microsoft also doesn't break out Azure's margins. Why hide it?
Meanwhile, Alphabet's $Alphabet(GOOGL)$ Google Cloud remains an even smaller competitor that only recently began making a profit. Its 2023 Q2 operating income was $395 million on $8.0 billion in cloud revenue.
Years of growth ahead
Investors should be OK with a stable market share if the industries keep expanding as they have. Some researchers believe e-commerce will make up nearly 30% of U.S. retail by 2030, up from 15% today.
The global cloud computing market is also expanding. Researchers believe it can grow at a mid-teens growth rate and reach $1.5 trillion by the decade's end. As long as Amazon's market share remains intact, it could enjoy years of growth ahead.
Amazon's culture for years has featured constant irons in the fire, looking for the next business unit it can scale. Investors should keep sight of that. The company has an estimated 200 million Prime memberships, a massive distribution channel to create and grow new revenue streams on the consumer side.
Shares are still attractive at this valuation
Until the day comes that Amazon isn't heavily investing in growth, I'll continue looking at its stock's valuation through the operating cash flow the business generates.
While the stock has been up big since January, investors must consider that it came from its lowest valuation (relative to operating cash flow) in over a decade. Indeed, 2022 was brutal.
Data by YCharts
The stock is still notably below its average valuation over the past decade. Shares may not be the jaw-dropping bargain they once were, but there is enough meat left on the bone that investors could see a meaningful amount of Amazon's future growth reflected in their investment returns.
What to look for in Q2 earnings
The company will report its Q2 earnings within a week, and there will be two major focus points. First, the e-commerce business will look to continue its strong momentum from Q1, when North American sales grew 11% year-over-year.
Consumer sentiment trended lower through the quarter, so Amazon's results should show investors how closely Amazon has been correlated with discretionary spending.
Data by YCharts
Additionally, AWS's growth will be scrutinized. Alphabet's Google Cloud grew 27% year-over-year in Q2, and Azure (plus other cloud services) grew 26% year-over-year. The market will expect acceleration from Amazon's AWS, which grew 16% year-over-year in Q4 of its fiscal year 2023 (ended June 30). Falling meaningfully short could imply that Amazon is indeed losing some business.
Amazon's Q2 earnings won't make or break the overall investment thesis. The company has excellent market positioning in two tremendous businesses and options to add new growth over the long term. Nobody knows how the market will treat shares day-to-day, but I have a bullish rating on Amazon moving forward.
Source: Seeking Alpha
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