Investor enthusiasm for mega-cap tech stocks remains strong in 2023, with Meta (NASDAQ:META) and Nvidia (NASDAQ:NVDA) outperforming the S&P 500 Index and Nasdaq-100 Index. While Meta and Nvidia have seen significant gains, Amazon (NASDAQ:AMZN) has also delivered substantial returns, with its stock surging more than 71% year-to-date.

Despite macroeconomic challenges impacting consumer and enterprise spending, Amazon’s stock has thrived. A Wall Street analyst predicts a $230 price target – the highest on the Street – for Amazon’s stock within the next 12 months. Let’s explore the reasons behind this bullish outlook.

AWS: The Driving Force Behind Amazon’s Growth

Amazon’s cloud computing arm, Amazon Web Services (AWS), plays a crucial role in the company’s revenue and profitability. Despite macro headwinds affecting enterprise spending, AWS has maintained its leadership in the cloud space, reporting a 12% year-over-year revenue increase to $23.1 billion in the third quarter. With a quarter-over-quarter revenue boost of over $900 million, AWS’ operating income reached $7 billion, reflecting a substantial year-over-year increase of $1.6 billion. The operating margin for the quarter stood at 30.3%, demonstrating a quarter-over-quarter improvement of approximately 600 basis points.

In the short term, AWS may face challenges as enterprises optimize spending, but the company’s robust customer pipeline and improving cost structure are expected to bolster the segment’s performance. Amazon’s strategic moves, such as partnerships and feature enhancements, are poised to strengthen AWS’ competitive position and capitalize on AI-led growth opportunities.

Durable Growth in Advertising Segment

Amazon’s advertising revenue has shown resilience, with third-quarter revenues for the advertising division increasing over 25% to $12.1 billion. Leveraging machine learning for performance-based advertising offerings, Amazon aims to target highly relevant audiences while maintaining cost efficiency. The company’s success in the digital advertising segment is evident in its consistent revenue growth of more than 20% over the past several quarters.

Amazon plans to introduce advertisements into Prime Video shows and movies, anticipating an acceleration in the advertising segment’s growth rate. The durability of Amazon’s advertising business is further highlighted by its contribution to the company’s free cash flow.

Focus on Improving Profitability

The strength in AWS and the advertising business positions Amazon to improve profitability in the coming quarters. The company’s focus on enhancing operating efficiency and reducing costs, including workforce reduction and strategic network reorganization, is expected to support its bottom line.

Amazon’s ongoing initiatives, such as investments in same-day delivery capabilities, integration of AI capabilities, and a focus on cost reduction, indicate a positive outlook for future growth. Analysts share these sentiments, with 37 out of 41 analysts covering Amazon providing a “Strong Buy” recommendation.

Bottom Line

Amazon continues to defend and expand its leadership across cloud and retail. The durability of its advertising business, integration of AI capabilities, investments in delivery capabilities, and cost reduction efforts are anticipated to drive future growth and propel its share price higher. While the Street’s highest price target for AMZN is $230, indicating nearly 60% potential upside, the average price target suggests about 20% growth potential from current levels.

Featured Image: Unsplash @ Christian Wiediger

Please See Disclaimer