Is it too late to buy Amazon stock?

The rally in the stock market over the past year and a half has left many investors smiling. From the end of 2022 S&P 500 It rose by more than 37%. But this puts investors in a difficult situation as they try to figure out whether this momentum will continue.

for example, Amazon (AMZN -0.38%) During this period, the company achieved outstanding performance, with its stock price rising approximately 110%. Are you too preoccupied with how investors value stocks? Talking about stock price is fun, but understanding Amazon’s business, prospects, and valuation will help you decide whether you should buy the stock now.

Image source: Getty Images.

Grow your core business

Many people think of Amazon primarily as an online retailer. But there are also offline stores. However, the company generates most of its revenue from its cloud computing division, Amazon Web Services (AWS).

Last year, AWS generated $24.6 billion in operating profit, or two-thirds of the company’s total operating profit. Moreover, AWS’s 2023 operating margin of 27.1% was significantly higher than the approximately 4% margin generated by its North American retail segment. And the international retail sector didn’t make a profit last year.

AWS’s revenue growth remains strong. In the first quarter, the segment’s revenue increased 17% year-over-year to $25 billion. That scale delivers certain advantages, including the ability to build and maintain data centers. And AWS benefits from businesses relying on increasingly large amounts of data. According to Statista, global cloud spending increased to $76 billion in the first quarter. According to Synergy Research Group, the cloud market is growing 21% annually.

Even amidst this good news, there are potential issues that investors should pay attention to. AWS continued to lead the cloud infrastructure space in the first quarter with 31% market share, but this was down 1 percentage point compared to the same quarter last year. the two biggest competitors microsoft and alphabetTheir market shares were 25% and 11%, respectively.

other business

Amazon’s North American and International segments continued to report good sales growth. In the first quarter, North American sales increased 12%, while international growth was 11% (both figures exclude the impact of currency fluctuations).

Profitability has improved significantly, which management said has led to increased unit sales and advertising revenue. Operating profit in the North American segment was $5 billion compared to $898 million in the year-ago period, while the International segment swung from a loss of $1.2 billion to a profit of $903 million.

Advertising services remain a strong growth driver. Revenues from that source have increased more than 20% in several consecutive quarters, including 24% in the most recent period. The extensive reach of Amazon’s online platform and Prime subscription service allows advertisers who purchase space on Amazon to target specific audiences. The advertising business is likely to continue to grow as a major source of revenue in the future.

high value

With all of Amazon’s success, long-term investors have been richly rewarded, and the stock isn’t cheap as a result. The stock trades at a price-to-earnings ratio (P/E) of 50, which is nearly double that. S&P 500The ratio of is 27.

That’s not necessarily a bad thing. However, this means that the market has already reflected high expectations for continued growth. This slowdown in expansion is likely to hit the stock price hard due to P/E multiple contracts.

Things are going well for Amazon and AWS has good long-term prospects. However, I would forgo buying additional shares of the company right now, considering its rich valuation.