4. Amazon.com Inc. (NASDAQ: AMZN)
Average Upside Potential as of October 23: 18.17%
Number of Hedge Fund Holders: 308
According to analysts, Amazon.com, Inc. (NASDAQ:AMZN) is arguably one of the best Dow stocks to buy, owing to the diversified nature of its business empire and tremendous opportunities for growth. While the company is best known for its e-commerce operations, it’s become a key player in the artificial intelligence race, strengthening its growth prospects in cloud computing.
An increasingly important aspect of Amazon’s operations is its third-party seller services division. With little risk, it is its second-largest revenue segment and offers a pleasant profit boost. It makes sense that Amazon.com, Inc. (NASDAQ:AMZN) provides this service to independent sellers who wish to join the Amazon network, given that it has established a sizable warehouse footprint and logistics network to transport goods from seller to buyer. Because third-party sellers are in charge of maintaining the product inventory, the business benefits from this.
With an annualized run rate of $50 billion and a 20% growth rate, Amazon’s advertising division is now a significant player in digital advertising, trailing only Facebook, Instagram, and Search. However, advertising should continue proliferating as Amazon can better target ads to customers more likely to purchase by connecting its vast customer data. Additionally, there are still unexplored opportunities in this segment.
For Amazon.com, Inc. (NASDAQ:AMZN), advertising is a rising star. With a 20% increase in revenue in the second quarter, it is currently the segment with the fastest growth rate, and it is not finished yet. Although it has experienced rapid expansion, management says it thinks video advertising is still in its infancy. Its commerce business also benefits significantly from advertisements, contributing to the recent profit margin increase.
Going by the tremendous opportunities for growth to generate long-term value, Amazon is rated as a strong buy with an average price target of $224.16, implying an 18.17% upside potential.
According to Insider Monkey, Amazon.com, Inc. (NASDAQ:AMZN) is currently the most widely held stock among hedge funds. As of Q2 2024, 308 hedge funds had stakes in the company, reflecting its strong appeal to institutional investors.
Alphyn Capital Management stated the following regarding Amazon.com, Inc. (NASDAQ:AMZN) in its Q3 2024 investor letter:
“Amazon.com, Inc.’s (NASDAQ:AMZN) continued growth is driven by its strong performance in AWS and advertising, which grew 19% and 20%, respectively. E-commerce growth moderated to 9.3%, likely due to softer consumer demand.
In previous letters, I mentioned how Amazon’s heavy investments in logistics and fulfillment suppressed margins for some time, but the company is now reaping the rewards of those earlier expenditures. European operations have been profitable for the second consecutive quarter, while North American operating margins have risen from pandemic lows to 5.3%. A key ongoing area of focus for Amazon has been reducing the “cost to serve”; this is beginning to show tangible benefits. In 2023, Amazon undertook a “regionalization” strategy, which divided the U.S. into eight distinct regions for fulfilment and transportation, with corresponding distribution centres in each. As I learned from an expert interview done by InPractise, “regionalization” has resulted in estimated shipping expenses dropping from $4.76 per unit to $4.50, and they are now approximately $4.26, with potential reductions of 2-3% annually. Interestingly, Amazon leaned on its third-party vendors (3P) to finance much of this strategy. It did so by requiring 3P vendors to ship inventory to the multiple regional distribution centers, instead of to a single location as they used to do.
Moreover, Amazon imposed penalties for failing to meet strict minimum and maximum quantities. In this way, Amazon used 3P inventory to expand its distribution capacity by around 24 million square feet, much of which it could use for its own 1P inventory. Clever strategy, but one wonders if this raises the risk of an eventual vendor backlash due to the added financial and logistical pressures on 3P sellers.
Like Alphabet, Amazon invests heavily in its AWS infrastructure to support its growing AI business. In the first half of the year, the company spent $30.5 billion on capital expenditures, with plans to exceed that in the year’s second half. When questioned about this during the earnings call, CEO Andy Jassy emphasized that they are seeing significant demand for AI-related services, which he believes will become a “very large” business for Amazon.”
