Is Amazon Stock Ready for a Significant Rebound?

Globe and Mail

a day ago

Amazon (AMZN) stock has faced a bumpy ride so far this year. Shares of the technology giant are down about 6% year-to-date amid lingering macroeconomic uncertainty. However, the macroeconomic headwinds that have weighed on Amazon stock are largely priced in. At the same time, the company's underlying business remains solid and has shown resilience.
Notably, Amazon Web Services (AWS), its cloud division, continues to deliver solid growth, and the momentum in its advertising segment continues. These businesses offer steady revenue and margin expansion potential, providing a solid foundation for a significant rebound in AMZN stock.
AWS: Amazon's Profit Powerhouse
Amazon's AWS segment continues to be a significant growth catalyst for Amazon. The segment continues to post solid growth, delivering $29.3 billion in revenue in the first quarter of the year, up 17% from the same period last year. This puts AWS on an annualized revenue run rate of more than $117 billion, making it one of the top players in the cloud industry.
A combination of expanding demand for generative AI solutions and ongoing migration from on-premises IT infrastructure to the cloud is supporting the segment's growth. Amazon's AI business is already delivering multibillion-dollar annual revenues, and is growing at triple-digit rates. Further, it remains in its early stages, signaling a long growth runway ahead.
Importantly, AWS is not just a revenue growth driver, it's a profit engine. The segment generated $11.5 billion in operating income in the first quarter, representing the majority of Amazon's total operating profit. As Amazon continues to improve efficiency within AWS, the cloud business will support the company's overall profitability.
Further, with a significant share of global IT spending still allocated to on-premises infrastructure, the cloud transition is far from over. Over the next decade or two, this shift will accelerate. AWS has the potential to become a multi-hundred-billion-dollar business and the rise of AI further bolsters its long-term prospects.
Advertising: An Underrated Growth Driver
Beyond the cloud, Amazon's advertising segment is showing tremendous promise. In the first quarter, ad revenue surged 19% year-over-year, reaching $13.9 billion. This growth, coming off an already large base, reflects the increasing relevance and strength of Amazon's advertising business.
The company is benefiting from the broader adoption of its advertising solutions, which appeal to brands seeking to reach consumers across different stages of the buying journey. Advertising is now a key contributor to Amazon's profitability, both in North America and internationally, and this business is poised to become an even more prominent driver of earnings in the future.
E-Commerce Efficiency and Cost Improvements
While Amazon's cloud and advertising units shine, its e-commerce operations remain resilient. Amazon is focusing on improving efficiency across its fulfillment and delivery networks. A significant overhaul of its inbound logistics network has led to enhanced inventory placement, increased units per package, and, ultimately, lower delivery costs.
The company is also focused on several initiatives aimed at driving operational efficiency. These include building more same-day delivery sites, expanding its rural delivery network, and incorporating automation and robotics into fulfillment centers. Moreover, strategic inventory management is reducing delivery time and lowering shipping and packaging costs. These improvements will help expand margins in the future.
Amazon Is Investing in Long-Term Growth
Amazon continues to make significant investments in infrastructure and technology. Much of this capital is directed toward AWS, where Amazon is developing custom silicon chips, such as Trainium, to support AI workloads. These investments aim to bolster future growth and maintain its leadership in an increasingly competitive cloud landscape.
Additionally, Amazon is expanding its fulfillment and transportation infrastructure to accommodate future demand and enhance delivery speed. By investing in areas that directly support revenue growth and cost reduction, Amazon is setting the stage for sustained profitability in the years ahead.
Analyst Sentiment Remains Bullish
Wall Street analysts remain optimistic about Amazon's future and have a 'Strong Buy' consensus rating. The Street high price target of $305 represents a 47% potential gain from current levels.
Conclusion: Is AMZN Stock Poised for a Rebound?
Although Amazon stock has experienced some turbulence, the long-term outlook remains promising. The company's cloud and advertising businesses are delivering strong and consistent growth. Moreover, they're driving profitability. AWS continues to dominate the cloud space and will benefit from secular trends such as AI adoption and cloud migration. Meanwhile, Amazon's advertising arm is becoming a significant earnings contributor.
In addition, Amazon's ongoing efforts to enhance efficiency in its e-commerce operations, combined with its strategic investments in infrastructure and innovation, position it well to deliver strong earnings. In summary, all these initiatives are building a solid foundation for significant future gains.