Somewhat quietly, Amazon (NASDAQ: AMZN) had a remarkable year in 2023. Despite not receiving as much attention as AI stocks like Nvidia and not being part of the tug-of-war between Microsoft and Alphabet in generative AI chatbots, Amazon concluded 2023 with an impressive 81% climb.
The uptick was spurred by a significant sell-off in the stock in 2022, leaving it oversold, and a notable resurgence in its profit margins throughout 2023. These improvements were attributed to Amazon’s most extensive cost-cutting endeavor to date, which involved laying off approximately 27,000 employees and shutting down experimental ventures such as its Scout home delivery robot and Amazon Care healthcare clinic. Additionally, the company gained leverage by expanding into warehouse capacity built during the pandemic.
As we enter 2024, investors may be contemplating whether Amazon is still a compelling investment. Let’s delve into the factors that will impact the company’s stock performance in the coming year.
Image source: Amazon.
Potential for Further Margin Expansion
Founder Jeff Bezos’ leadership was characterized by an aggressive pursuit of market share at the expense of profits, while current CEO Andy Jassy seems to be steering the company in the opposite direction.
Since assuming leadership in 2021, Jassy has been focused on monetizing Amazon’s existing businesses and extracting more profits from them. Primarily, he has concentrated on high-margin ventures like the third-party marketplace, advertising, and Amazon Web Services (AWS), its cloud computing arm. Jassy has also scaled back on unprofitable projects such as Alexa.
Jassy still has plenty of opportunities to capitalize on Amazon’s prior investments to bolster the bottom line. For instance, Amazon plans to introduce advertisements to Prime Video at the end of the month, unless subscribers choose to opt out by paying. This decision aligns with the company’s extensive advertising network on its e-commerce platform, where it has built relationships with both major brands and small online sellers. Notably, ad-based streaming has become more prevalent, with peers like Netflix, Walt Disney, and Warner Bros. Discovery all recently adding ad-based tiers to their offerings.
Amazon achieved an operating margin of 7.8% in the third quarter, nearly a record for the company, and its margins are expected to naturally enhance as it harnesses infrastructure such as its logistics network and the cloud data centers powering AWS.
Amazon and the AI Prospect
Like many other major tech companies, artificial intelligence (AI) presents a substantial opportunity for Amazon. Despite this, the company’s AI endeavors have not garnered as much attention as those of some of its competitors.
Its primary AI-focused venture is Amazon Bedrock, a cloud-based service enabling users to construct generative AI applications using foundation models. Furthermore, Amazon has developed its own AI chips for model training and inference, and it has committed to investing up to $4 billion in Anthropic, an AI startup known for its chatbot Claude, a rival to ChatGPT.
While Bedrock appears to be a clever means of expanding AWS capabilities into AI, it remains uncertain how much adoption the company has achieved with Bedrock. The investment in Anthropic seems like an endeavor to catch up in the AI chatbot race, particularly since Alphabet had previously invested in Anthropic, and Microsoft has a close partnership with OpenAI.
Is Amazon a Sound Investment in 2024?
Amazon still appears expensive from a traditional standpoint, trading at a price-to-earnings ratio of 78. However, this valuation seems warranted given the company’s history of exceptional growth and the potential for continued margin expansion.
The company’s financial performance has been notoriously challenging to predict, and this is likely to persist in 2024. Nevertheless, Jassy’s strategy and the broader operational leverage in the business are poised to continue yielding positive results this year. Furthermore, an economic recovery would be advantageous for Amazon, especially given the slowing growth at AWS due to cautious business spending.
While another 81% surge like in 2023 may be unlikely, Amazon seems to be a promising contender for stock appreciation in 2024, particularly if it can make headway in AI or surprise investors with another round of substantial margin expansion.
Where to invest $1,000 right now
When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for two decades, Motley Fool Stock Advisor, has more than tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now… and Amazon made the list — but there are 9 other stocks you may be overlooking.
*Stock Advisor returns as of December 18, 2023
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon, Netflix, and Walt Disney. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, Netflix, Nvidia, Walt Disney, and Warner Bros. Discovery. The Motley Fool has a disclosure policy.