E-commerce giant Amazon (AMZN) has been a long-term market outperformer. The 29% gain this year and 125% increase over the past five years by AMZN stock tops the performance of the benchmark S&P 500 index. Now, Amazon’s share price might get another boost as the company’s profit margins rise. This fact, coupled with an appealing valuation and growing net income, make me bullish on the stock.
Compelling Valuation
Amazon’s second-quarter results sparked a rally that lifted the stock’s market capitalization above $2 trillion and gave me reason to be bullish on the company. Revenue during Q2 increased by 10% from a year earlier. However, the bigger story was a 99.8% year-over-year improvement in the company’s net income. That growth brought Amazon’s net profit margin to 9.1%, which is higher than in the previous three quarters. Amazon closed out the quarter with $148 billion in revenue and $13.5 billion in net income.
Rising profits have lowered the valuation on AMZN stock below historic levels. Amazon closed out Q2 with a positive price-to-earnings (P/E) ratio below 50 for the first time. Today, the stock trades at 33 times futures earnings estimates, which is historically low for the company and matches the average P/E ratio of the technology-laden Nasdaq index right now.
Amazon’s profit margins have been trending upwards too, which makes me bullish on the stock. The valuation should get even more attractive as the company’s future earnings accelerate.
E-Commerce Remains Strong
Amazon’s online marketplace remains strong, which also makes me bullish on the stock. Online sales increased 5% year-over-year in Q2, while third-party seller services rose by 12% from a year ago. Even though profitability is lower in these segments, growth is still important for these parts of Amazon’s business. They generated a combined $91.6 billion of the company’s $148 billion Q2 revenue.
Growth looks to have momentum heading into the lucrative year-end holidays. Industry analysts are forecasting that holiday sales this year will grow an annualized 4.8% to $1.372 trillion. Amazon always has a large presence during the holidays, and this year should be particularly strong as the company kicks off its year-end sales in October rather than November.
Amazon’s AI Opportunity and Rising Ad Sales
Another reason to be bullish on AMZN stock is the company’s push into artificial intelligence (AI). Most of Amazon’s AI potential lies in its Amazon Web Services (AWS) cloud computing segment that has seen accelerating growth in recent years. AWS closed out Q2 with 19% year-over-year growth. The cloud platform generated $26.3 billion in sales, representing almost 20% of total revenue.
Moving forward, Amazon is in a great position to help companies with their AI applications. That’s because Amazon can provide a lot of computing power and data storage. Many companies turn to AWS for their storage, and the tech giant’s new AI features make the cloud platform even more attractive. AWS is becoming a top resource for companies wanting to create AI services for speech, vision and documents.
Advertising is also providing a bullish catalyst for Amazon. While e-commerce and cloud computing are the company’s main revenue sources, advertising is becoming a larger part of Amazon’s total sales. Ad revenue is also driving up profit margins. Advertising sales grew by 20% year-over-year to reach $12.8 billion in Q2 of this year. Amazon has maintained a 20% growth rate in its ad sales for several quarters now, and holiday demand should further boost that revenue stream.
Is Amazon Stock a Buy or Sell?
Forty-four Wall Street analysts rate Amazon stock a Strong Buy. That’s based on 44 Buy and one Hold recommendations made in the last three months. There are no Sell ratings on the stock. The average price target on AMZN stock of $223.25 suggests 15.10% upside potential from current levels.
Read more analyst ratings on AMZN stock
The Bottom Line on AMZN Stock
Amazon’s profit margins have been growing nicely over the past few quarters fueled by new opportunities in AI and advertising. While e-commerce doesn’t generate the highest profit margins, it’s good to see that Amazon is still growing on that front. Rising profit margins have resulted in a low valuation for the technology giant and higher net income also makes the stock look attractive right now.
