In the midst of the excitement surrounding artificial intelligence, Amazon.com Inc. (NASDAQ:AMZN) is poised to remind Wall Street of its formidable retail presence with the upcoming Prime Day 2024 event. The two-day shopping extravaganza, starting Tuesday, is anticipated to showcase robust growth and reinforce Amazon’s dominant position in both e-commerce and retail.
Prime Day’s Impact on Retail
Prime Day has evolved from a revenue-generating event to a crucial indicator of Amazon’s retail health. This year’s event is expected to underline how the investments made during the COVID-19 pandemic continue to yield returns, particularly through improved efficiency and margins. Mike Brenner, a research analyst at FBB Capital Partners, notes, “Prime Day used to be about revenue, but now investors are looking for growth and margins. If Amazon can improve its retail margins, it will definitely drive the stock higher.”
Strong Financial Performance
In the second quarter, Amazon reported $1.33 billion in net income, beating the average analyst estimate of $1.23 billion. Earnings per share came in at 66 cents, also surpassing expectations. While Prime Day sales are no longer the primary stock driver, a strong performance would justify the 29% rally in Amazon’s stock in 2024, pushing its market valuation above $2 trillion. Shares rose 2% on Tuesday, reflecting investor optimism.
AI and AWS Contributions
Amazon’s advances in artificial intelligence, particularly through its Amazon Web Services cloud-computing division, have significantly contributed to its growth. AWS, Amazon’s most profitable unit, accounted for less than 16% of total sales last year but showed a growth rate of 13%, faster than the 5.4% seen in online stores. The company reported that generative AI represents a “multi-billion dollar revenue run rate business,” further boosting its market position.
Retail: The Core of Amazon’s Business
Despite the focus on AWS, retail remains Amazon’s primary revenue driver. In 2023, online stores accounted for 40.3% of Amazon’s revenue, while 24.4% came from commissions and services sold to third-party sellers on its platform. Amazon’s recent revenue forecast showed signs of caution, particularly in the e-commerce sector. However, there is optimism that Prime Day will alleviate some concerns, aided by the launch of Amazon’s new AI shopping assistant.
JPMorgan analyst Doug Anmuth stated, “Prime Day should promote an early start to back-to-school/college shopping during a quieter time in the retail calendar. The financial benefits extend well beyond the 2-day event period.” JPMorgan projects a total gross merchandise value of $12.4 billion for Prime Day, an increase of 12%, and $7.9 billion in total retail net sales. Of that, $5.8 billion will be revenue that Amazon would not have generated without Prime Day.
Strategic Shifts and Market Position
Amazon’s retail strategy includes expanding its offerings and improving efficiencies to maintain its competitive edge. The company plans to introduce an alternative investments platform for qualified, self-directed individual investors this year. Notably, six out of ten new clients are under the age of 40, highlighting a demographic shift.
Amazon’s dominant position in both retail and cloud computing supports the argument that its shares are a relative bargain. The stock trades at 33 times estimated earnings, above the Nasdaq 100’s multiple of 27 but well below Amazon’s 10-year average of 55. This valuation remains close to multiyear lows, indicating potential for growth.
Future Growth Prospects
Amazon is expected to generate revenue growth of 11% this year, maintaining a double-digit pace for the subsequent two years. Net earnings are projected to soar by 63% this year. With more than 95% of analysts recommending buying Amazon, the average price target points to a 15% upside, the highest return potential among megacaps.
FBB’s Brenner sums it up, “This kind of growth can support the multiple, which I think will continue to compress as Amazon maintains strong earnings growth. It would be a little flip to call the retail business gravy, but Amazon’s clearly an amazing company even without AWS.”
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