1. Amazon.com Inc (NASDAQ:AMZN)
Number of Hedge Fund Investors: 308
Brent Thill from Jefferies recently said in a program on CNBC that while he is bullish on Amazon.com Inc (NASDAQ:AMZN) in the long term, the market’s concerns around Amazon’s Cloud margins are warranted. However, he believes Amazon.com Inc (NASDAQ:AMZN) is going through a ‘tactical change’ and will be able to solve these issues in the long term.
“On margin, so, I think all the fears are warranted, and certainly, they’ve been saying this, they can’t sustain a 36%, 37% margin at AWS. We have margins going into the low 30s, the rest of the Street already has that forecasted, so, I think part of this is expected, and then part of it is, like, are we going to open up the closet and is it going to be, you know, something scary or — and long-term, or is this going to be a short-term impact.”
The analyst also said investors should “brace” for further margin declines.
“Income could fall in the interim, given what’s happening. In the front half of the year, two-thirds of Amazon’s profitability is from AWS, and the margins were unsustainable at 37%, 36%, so, margins will fall in the back half of the year in Amazon AWS.
They’re getting ready for A.I., they’re about to launch satellites to help, you know, in rural areas to get access to help those businesses and consumers, you know, there’s an advanced investment, as we go into the holiday season. So, I think given the outperformance and the margin, remember, they have been beating pretty big on that income.
So, I think that most of us all have that in our model. So, we believe tactically it’s important to call that out, that some of the margins in their most profitable business is probably unsustainable in front of the biggest A.I. wave that we’re seeing. So, I think everyone should be braced for that.”
Amazon.com Inc (NASDAQ:AMZN) threw it out of the park with its latest quarterly results amid strong Cloud growth. Amazon Web Services has generated $27.5 billion in revenue, marking a 19% year-over-year increase. The segment’s operating income is expanding at nearly 2.5 times the rate of its revenue growth, boosting Amazon.com Inc (NASDAQ:AMZN)’s overall operating income. At this pace, AWS is on track to deliver $110 billion in annualized revenue. If it maintains its ~20% growth rate, AWS could reach $125-130 billion in revenue in FY 2025.
For the ongoing quarter, Amazon.com Inc (NASDAQ:AMZN) expects revenue between $181.5 billion and $188.5 billion, implying growth of up to 11%. Amazon.com Inc (NASDAQ:AMZN)’s stock currently trades at a forward P/E of 32.9, higher than the big tech average of 25.5. If Amazon.com Inc (NASDAQ:AMZN) grows its earnings per share (EPS) by an average of 25% annually over the next three years, it could achieve an EPS of around $9.25 by FY 2027 (up from an estimated $4.74 in FY 2024). Applying a 35x P/E ratio in line with Amazon.com Inc’s (NASDAQ:AMZN) historical average suggests a fair stock value of over $300. The primary catalyst for this target would be AWS’s robust operating income growth.
Polen Focus Growth Strategy stated the following regarding Amazon.com, Inc. (NASDAQ:AMZN) in its Q3 2024 investor letter:
“The largest absolute detractors were Alphabet, Airbnb, and Amazon.com, Inc. (NASDAQ:AMZN). Amazon’s position as a notable detractor speaks more to the size of the position than the magnitude of the underperformance, as the company delivered a solid set of results during the quarter.
We trimmed our positions in Amazon, Alphabet, and Microsoft during the quarter. As we have previously, we trimmed Amazon slightly to bring the weight back to 15% for risk management purposes. We remain very positive on our investment thesis of strong revenue growth and even stronger earnings and free cash flow growth continuing over the next few years.”
While we acknowledge the potential of Amazon.com Inc (NASDAQ:AMZN), our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AMZN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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