1. Amazon.com (NASDAQ:AMZN)
Number of Hedge Fund Investors: 308
Amazon (NASDAQ:AMZN) threw it out of the park with its latest quarterly results amid strong Cloud growth. Amazon Web Services is 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’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 expects revenue between $181.5 billion and $188.5 billion, implying growth up to 11%. Amazon’s stock currently trades at a forward P/E of 32.9, higher than the big tech average of 25.5. If Amazon 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’s historical average suggests a fair stock value of over $300. The primary catalyst for this target would be AWS’s robust operating income growth.
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 fulfillment and transportation, with corresponding distribution centers 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 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 is investing 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.”
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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