Why Has Amazon Stock Risen Over 20% This Year And Can It Continue?

Summary:

• Amazon’s stock price has risen by more than 20% in 2023 thus far, as AMZN has a positive short-term and long-term outlook based on a review of its key metrics.
• I see AMZN’s shares continuing to rise, as Amazon’s stock is undervalued and there is a reasonably high likelihood of the company’s actual 2023 financial results surprising on the upside.
• I leave my Buy rating for Amazon unchanged on the basis that AMZN’s shares still have upside potential.

Elevator Pitch

I still rate Amazon.com, Inc.’s (NASDAQ:AMZN) shares as a Buy. With my earlier update for Amazon written on January 10, 2023, I discussed where I saw AMZN going in the next 5 years.

My latest article highlights that Amazon’s positive share price momentum in 2023 year-to-date is sustainable for three key reasons.

Firstly, AMZN’s valuations are appealing based on a comparison of its EV/EBITDA multiple and its EBITDA growth expectations. Secondly, Amazon is in a good position to deliver positive surprises with its performance for the rest of 2023, as the market has modest expectations of AMZN’s near term results due to a slower pace of growth for AWS in April. Thirdly, AMZN’s prospects for the long run remain intact taking into account the growth potential for both its existing and new businesses.

Therefore, I decide to stick with a Buy rating to Amazon, as I expect its shares to continue rising.

Why Has Amazon’s Stock Price Gone Up This Year?

Year-to-date, AMZN’s shares rose by more than +20%, or +23.3% to be exact. As a comparison, the S&P 500 was only up by +8.2% in 2023 thus far.

I believe that Amazon’s good stock price performance since the beginning of this year is largely attributable to positive read-throughs from metrics revealed as part of the company’s recent disclosures. Notably, AMZN’s share price went up by +4.7% and +4.6% on April 13 and April 27, respectively which coincided with the publication of its Q1 2023 earnings release and its 2022 shareholder letter.

In the next section, I detail the key metrics which have driven AMZN’s strong year-to-date share price performance.

AMZN Stock Key Metrics

The takeaways from key metrics disclosed in Amazon’s first quarter results announcement and annual shareholder letter are pretty favorable.

AMZN’s Q1 2023 financial performance was excellent.

Revenue for Amazon increased by +9.4% YoY from $116.4 billion in the first quarter of 2022 to $127.4 billion for the most recent quarter. This represented an acceleration in top line expansion as compared to the company’s +7.3% YoY and +8.6% YoY revenue growth rates for Q1 2022 and Q4 2022, respectively. Amazon’s actual Q1 2023 revenue surpassed the Wall Street’s consensus top line forecast of $124.6 billion by +2.2%. It is encouraging to see Amazon achieving faster top line growth that were above expectations in the recent quarter, which suggest that AMZN has been reasonably resilient in a weak economic environment.

The company’s Q1 2023 operating profit of $4,774 million and earnings per share of $0.31 exceeded the market’s consensus estimates by +51.6% (source: S&P Capital IQ) and 43.3%, respectively. In its 2022 shareholder letter released on April 13, Amazon shared that it has “scrutinized every process path in our fulfillment centers and transportation network and redesigned scores of processes and mechanisms” in recent months, and this has clearly paid off as evidenced by AMZN’s above-expectations Q1 profitability.

Separately, Amazon outlined specific metrics in the company’s 2022 shareholder letter which drew investors’ attention to the long growth runway for AMZN’s core businesses.

Specifically, Amazon mentioned in its recent yearly shareholder letter that approximately 80% “of total market segment share in global retail still resides in physical stores” and highlighted that “90% of Global IT spending” are “still on-premises.” In other words, AMZN is implying that its online retail business and AWS (Amazon Web Services) still have substantial room to grow further in the future, considering that the current penetration rates of online retail and cloud IT spend are still very low at 20% and 10%, respectively.

The metrics highlighted above explain why Amazon’s shares have done well in the first four months or so of this year. The next question is to ask is whether Amazon’s stock is still attractively valued after the recent run-up, which is a topic that I address in the subsequent section.

Is AMZN Overvalued Or Undervalued?

In my opinion, Amazon’s shares remain undervalued despite the company’s year-to-date stock price outperformance.

I see a mismatch between AMZN’s EV/EBITDA valuation metric and the company’s EBITDA growth expectations. As per consensus financial projections sourced from S&P Capital IQ, the sell-side analysts expect Amazon to deliver n EBITDA CAGR of +20.2% for the FY 2023-2026 period. In comparison, Amazon trades at a consensus forward next twelve months’ EV/EBITDA multiple of 13.0 times (source: S&P Capital IQ).

The consensus EBITDA growth forecast for AMZN is realistic, considering the low penetration rates of its key markets and its efforts targeted at reducing fulfillment expenses as discussed in the prior section.

Taking into account the company’s expected annualized EBITDA growth rate of +20.2%, I think that Amazon deserves to be valued at a higher EV/EBITDA multiple at the high-teens or low-twenties level to be aligned with its EBITDA growth expectations. As such, I deem AMZN’s stock to be undervalued.

Is A Correction Likely To Occur Or Will It Continue To Rise?

I am of the view that Amazon’s share price should continue to rise going forward, rather than suffer from a correction.

One key factor is the stock’s valuations. In the preceding section, I have already noted that AMZN’s shares are undervalued, which indicates there is room for valuation multiple expansion that could drive its stock price higher.

The other key factor is the company’s business outlook.

At its Q1 2023 earnings call, Amazon revealed that AWS’ YoY revenue growth had moderated from +16% in the first quarter of this year to around +11% for April 2023. As such, expectations for AWS have been lowered significantly, which leaves room for upside surprises. It is noteworthy that AMZN emphasized in its 2022 shareholder letter that its “new customer pipeline is robust” and indicated that it has observed more “enterprises opting out of managing their own infrastructure” and switching to AWS. This suggests that while there are companies cutting IT spend in difficult times like these, the challenging economic environment is also accelerating the shift to outsourced cloud services which benefits AWS. This means that while AWS revenue growth could continue to slow, the actual rate of top line deceleration might not be as bad as feared.

Also, the moderation in AWS sales expansion could be offset by lower than expected capital expenditures and fulfillment costs. In the company’s Q1 2023 10-Q filing, Amazon highlighted that the company benefited from “fulfillment network efficiencies” in Q1 2023, which I expect to continue being a positive factor for AMZN’s profitability going forward. AMZN also guided for “cash capital expenditures to decrease in 2023, primarily due to lower spending on our fulfillment network” as per its recent 10-Q filing. This points to upside for Amazon’s 2023 operating income and free cash flow.

Therefore, there is a good chance that Amazon’s actual financial performance for Q2 2023 and the rest of this year will exceed expectations, which will be a re-rating catalyst for the stock.

What Is The Long-Term Outlook?

I have a favorable view of Amazon’s outlook for the long term. Earlier in this article, I cited the sell-side’s estimate of a +20.2% FY 2023-2026 EBITDA CAGR for AMZN. Apart from improving profitability driven by cost optimization (e.g. fulfillment expenses) and operating leverage, Amazon’s revenue growth potential relating to existing and new businesses are supportive of the bullish outlook for the company.

For its existing businesses, I have previously highlighted the low penetration rates relating to worldwide cloud IT spend and online retail.

With respect to new businesses, Amazon continues to explore growth opportunities in various areas. In the company’s 2022 shareholder letter, AMZN specifically mentioned that healthcare and Kuiper could possibly be as successful and significant as AWS in the years to come.

In a prior August 5, 2022 article for AMZN, I mentioned that Amazon “signaled its intentions to become a key player in the healthcare market by proposing to buy primary care platform One Medical.” I also noted in that August 2022 write-up that “AMZN’s valuation multiples will continue to expand over time driven by an increased percentage of revenue generated from higher-margin services” such as healthcare in the long run. I continue to have a positive opinion about Amazon’s venture into healthcare as per my earlier write-up.

Separately, AMZN refers to “Project Kuiper” as “an initiative” to “bring fast, affordable broadband to unserved and underserved communities” via “a constellation of 3,236 satellites in low Earth orbit on its website. Amazon plans to start offering commercial services next year, and stressed in its shareholder letter that Kuiper has a “large prospective consumer, enterprise, and government customer base” and substantial “operating profit potential” just like AWS.

In summary, Amazon’s long-term outlook is good. AMZN’s existing core businesses have long growth runways as evidenced by low penetration rates for the markets they operate in, while the company continues to seek out new growth opportunities which expand its Total Addressable Market or TAM.

Is AMZN Stock A Buy, Sell, Or Hold?

Amazon’s shares continue to warrant a Buy rating. My view is that AMZN’s stock still has legs to run, in consideration of its short term outlook and long term growth prospects.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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