Is Amazon a Must-Own Stock in the Magnificent 7?

In 2024, Amazon (NASDAQ: AMZN) has experienced a year of solid growth, showing an increase of 31%. This growth reflects Amazon's diverse business model, which operates across multiple sectors within the consumer discretionary space. With such a broad range of services, Amazon aims to excel in all areas. The crucial question is: how effectively is Amazon managing these diverse operations, and should investors consider it a vital addition to their portfolios in the Magnificent 7?

Understanding Amazon's Business Structure

Current Overview of Amazon

$197.93

+11.53 (+6.19%)

(As of 11/1/2024 08:55 PM ET)

52-Week Range

$136.47

▼

$201.20

P/E Ratio

42.38

Price Target

$246.02

Amazon operates across four main business segments. The largest is retail commerce, encompassing the Online Store, Third-Party Seller Services, and Physical Stores divisions. Together, these divisions contributed to 67% of Amazon's total revenue over the past year. The company faces strong competition from players like Walmart (NYSE: WMT).

The second largest segment is Amazon Web Services (AWS), which provides cloud computing services, allowing users to run applications without needing physical hardware. AWS accounted for 16% of total revenue and includes services such as data storage and AI model development.

Amazon’s advertising division contributes about 9% to the business. It generates revenue from ads placed on its platform as well as on other online networks. In the cloud sector, Amazon competes with tech giants like Google (NASDAQ: GOOGL) and Microsoft (NASDAQ: MSFT) for market share. The landscape is also competitive in advertising, with rivals like Meta (NASDAQ: META) and Netflix (NASDAQ: NFLX) increasingly vying for consumers' attention.

Finally, Amazon's subscription services, such as Amazon Prime and Prime Video, account for approximately 7% of the overall revenue. In this space, its competitors include the likes of Netflix, Google, and Spotify (NYSE: SPOT).

Assessing Amazon's Market Position

When analyzing Amazon’s standing in e-commerce, advertisements, and subscriptions, it is essential to note some trends. In the e-commerce domain, Amazon leads the U.S. market. Although Walmart's e-commerce has grown at a faster rate—21% last quarter compared to Amazon's 7%—Walmart's online business is only about half the size of Amazon's. Amazon remains dominant despite increasing competition in third-party seller services.

Amazon's MarketRank™ Analysis

Overall MarketRank™

99th Percentile

Analyst Rating

Moderate Buy

Upside/Downside

24.3% Upside

Short Interest Level

Healthy

Dividend Strength

N/A

Environmental Score

-1.25

News Sentiment

0.68

Insider Trading

Selling Shares

Proj. Earnings Growth

20.25%

See Full Analysis

Despite Amazon's e-commerce strength, the advertising and subscription sectors present more challenges. Meta, for instance, has a significant advantage in its ad services by utilizing artificial intelligence for personalized advertising on its platforms. Additionally, Netflix's launch of an ad-supported subscription may divert viewers from Amazon Prime Video, thus introducing a formidable advertising platform that Amazon has to contend with. However, Amazon’s bundled offerings through Prime—together with delivery, video, and music services—still provide compelling consumer value.

AWS: The Backbone of Amazon's Profitability

Among all its operations, AWS remains the most critical as it, despite its smaller revenue share of 16%, accounts for a striking 60% of Amazon's operating profit last quarter. AWS is not only growing but is doing so rapidly, with a reported growth rate of 19%, significantly up from 12% in Q3 2023. This acceleration, along with an 800 basis point rise in margins compared to last year, highlights AWS's robust position in the market.

While AWS's growth is slightly slower than that of Microsoft's cloud services, it's important to remember that Amazon commands the largest share of the cloud computing market. Furthermore, it is noteworthy that Amazon has a potential edge in developing its own AI accelerator chips, reducing its dependency on NVIDIA (NASDAQ: NVDA) products. This independence could facilitate quicker expansion by lessening delays linked to chip supply constraints.

At present, Amazon's forward price-to-earnings ratio is at a historically low level, remaining only slightly above that of Microsoft. Given the strength and potential of its core business, Amazon emerges as one of the more attractive options within the Magnificent 7 stock selection.

Investing Considerations for Amazon.com

Before making a decision to invest in Amazon, it is crucial to conduct thorough research. Current analyses suggest Amazon holds a "Moderate Buy" rating among experts; however, certain top-rated analysts are pointing towards other stocks that may offer better immediate returns.

In conclusion, while Amazon remains a powerful player with broad opportunities across its various operations, potential investors should weigh its advantages against the backdrop of increasing competition and market dynamics in its ecosystem.

Amazon, Investment, Business