The Nasdaq-100 technology index plunged into a bear market in 2022 on the back of a 33% loss for the year. But in its 37-year history dating back to 1986, the index has only fallen in consecutive years on one occasion — from 2000 to 2002, when the dot-com tech bubble burst.
True to that track record, the Nasdaq-100 bounced back with a whopping 53% gain in 2023. But it gets better, because bounce-back years like 2023 have always been followed by another positive year.
There have been four such occurrences since 1986, with an average annual gain of 21.5%. That’s the return investors might expect in 2024 if history repeats itself, and it’s supported by improving economic conditions like falling inflation and several expected interest rate cuts.
Amazon (AMZN -0.68%) could be one of the biggest beneficiaries of those economic shifts since it generates a significant amount of revenue from consumer spending. The company just reported results for the fourth quarter of 2023 (ended Dec. 31), and it’s already experiencing an acceleration in its core segments. Here’s why its stock is a buy now.
Amazon’s online sales set a record in Q4
Amazon delivered a record-high $170 billion in total revenue during the fourth quarter, representing 14% growth year over year. That was an acceleration from the 13% growth in the third quarter, and improved e-commerce revenue was a key reason.
Amazon started out selling books online in 1994, and despite its incredibly diverse portfolio of businesses, 41.5% of its revenue still comes from online sales. In the fourth quarter, that revenue hit a record-high of $70.5 billion, growing 8% year over year, which was the fastest pace of 2023.
A strong holiday season, an improving economy, and changes to Amazon’s fulfillment network all contributed to the result. Last year, the company broke its U.S. fulfillment network into eight regions, with distribution centers holding increased levels of inventory specific to each geographic area. That means goods travel shorter distances to reach customers, and it allows Amazon to deliver orders faster.
During 2023, these changes enabled it to deliver 4 billion items on the same day or the next day across America. In the fourth quarter alone, the number of same-day deliveries surged 65% year over year. It makes consumers more likely to choose the company for their shopping needs, and it also brings down costs, making the e-commerce business more profitable.
Amazon Web Services delivered revived growth, as investors hoped
Amazon Web Services (AWS) is the company’s cloud computing arm. It’s the industry leader, and it’s home to many of the company’s artificial intelligence (AI) initiatives. AWS revenue logged a quarterly record of $24.2 billion in the fourth quarter, representing accelerated 13% year-over-year growth.
Investors were watching AWS closely given its growth slowdown in early 2023, and the renewed upward move looks positive. CEO Andy Jassy says AWS is now approaching a $100 billion annual revenue run rate for the first time.
As the world’s largest cloud platform, it’s perfectly situated to lead the emerging AI industry. The company is tackling all three layers of the technology.
At the bottom is semiconductor hardware. Not only does AWS offer data center infrastructure using Nvidia‘s leading graphics processors (GPUs), but it has also developed its own chips.
AWS launched Trainium 2 last year with a fourfold performance boost over the first version for training AI models. It also offers an inferencing chip called Inferentia, which is used to improve the predictive capabilities of AI models.
Large language models (LLMs) sit in the middle layer, as the beating hearts of every finished AI application. Creating an LLM requires a significant amount of data and computing power, so they are often too expensive for businesses to develop.
AWS offers several ready-made LLMs from leading AI start-ups like Anthropic, in addition to Titan LLMs that Amazon developed in-house. Businesses can access these through AWS to accelerate their own AI ambitions.
Lastly, AI applications make up the top layer. The company recently launched Amazon Q, which is a generative AI application trained to be an expert on AWS. It can write, debug, and test computer code, in addition to answering questions and performing specific actions when prompted.
An emerging powerhouse in digital advertising
Amazon’s digital advertising segment also had a record-breaking quarter. The company’s flagship website, amazon.com, generates 2.7 billion visits per month, making it the ideal place to advertise to reach a large audience. Plus, Amazon owns a host of digital media assets like Prime Video, Twitch, and Amazon Music streaming services, which are creating new ad revenue streams.
The company recently introduced ads to Prime Video. The platform has over 200 million members, and it provides businesses with a self-service solution to create TV streaming campaigns to reach that audience.
This creates two new revenue streams: First, it pulls in ad revenue, and second, it attracts an extra $2.99 per month from those who want to upgrade to eliminate ads.
Overall, Amazon’s ad segment generated a record $14.6 billion in revenue during the fourth quarter, an accelerated growth rate of 26% year over year. It was the fastest-growing piece of Amazon’s entire business.
Why Amazon stock could outperform its big-tech peers in 2024
Amazon generated $574 billion in total revenue during 2023, and the company is currently valued at $1.8 trillion. So its price-to-sales (P/S) ratio, which measures a company’s revenue against its market cap, is just 3.1. By comparison:
- Nvidia stock trades at a P/S of 36.7.
- Microsoft has a P/S of 13.4.
- Meta Platforms has a P/S of 9.2.
- Apple has a P/S of 7.5.
- Alphabet has a P/S of 5.9.
In other words, Amazon stock is the cheapest among its trillion-dollar peers, by far. Yet it generates more revenue than all of them, including Apple (which delivered $383 billion in revenue during fiscal 2023, ended Sept. 30).
Amazon’s modest profitability is one reason for the discount. Its e-commerce segment, for example, operates on a razor-thin profit margin, which is how it keeps prices so low for consumers. All of the companies I mentioned above comfortably outperform Amazon at the bottom line.
However, Amazon had a blockbuster year in 2023, with $30.4 billion in net income, which improved from a $2.7 billion net loss in 2022. It translated to $2.90 in earnings per share, which Wall Street analysts predict will grow by 25% to $3.63 in 2024. As more of its gargantuan revenue drops to the bottom line, investors will ascribe its stock to a higher valuation because profits can be recycled through the business to fuel more growth.
Speaking of which, Amazon’s P/S ratio has steadily climbed since the end of 2022 (from around 1.7) alongside its accelerating revenue growth. Investors will typically pay a premium P/S valuation for a stock when they see faster growth, because they expect it will lead to more future revenue.
Investors have an opportunity to buy Amazon stock now for a great price while its core segments are on the upswing.