Amazon: Navigating the Market Waves and Clouds

Amazon, the global tech giant founded by Jeff Bezos in 1994 as a modest online bookstore, has come a long way. Today, Amazon’s reach extends far beyond its humble beginnings as a bookseller. It stands as one of the Big Five American tech companies, next to Alphabet (Google), Apple, Meta (formerly Facebook), and Microsoft.

In this article, we’ll look at the factors behind Amazon’s amazing stock market success, its dominance in the online retail industry, the crucial role that Amazon Web Services (AWS) played in the cloud computing revolution, and the delicate balance between growth and profitability that characterises its retail operations.

About Amazon

Amazon is one of the Big Five American tech companies, joining the ranks of Alphabet (Google), Apple, Meta and Microsoft. It is the largest e-commerce company in the world, while also holding a prime position as a provider of cloud computing and streaming services. The company, founded by Jeff Bezos in 1994, quickly evolved from an online bookstore to a vast online marketplace offering millions of products. As of July 2021, Amazon appointed Andy Jassy as its new CEO while Jeff Bezos holds the executive chair on the board of directors.

Making Waves in the Stock Market

In August, Amazon stock outperformed the wider market and history indicates the potential for a similar trend in September. Its stock, trading under the ticker symbol AMZN soared by 3.2% in August, extending its winning streak to six consecutive months. This marks the longest runs of monthly gains since July 2011. This was an impressive performance in light of the overall stock market’s performance, especially within the tech sector. During the same period, the S&P 500 experienced a 1.8% decline, while the tech-heavy Nasdaq saw a 2.2% dip.

As September unfolds, investors are preparing for what has historically been a challenging month for the stock market. September has consistently been the least favourable month of the year, with the S&P 500 averaging a 1.1% loss. Notably, the S&P 500 has declined during the last three consecutive Septembers.

September: A Changing Trend

Amazon tends to follow its own course during this historically turbulent month. Unlike its tech peer Apple (AAPL), which typically follows the wider market and faces a less favourable September, Amazon is showing a different trend. Despite Amazon shares declining for six consecutive Septembers, the wider historical performance points to a more positive outlook, indicating that Amazon might be set for a turnaround. Historically, Amazon has, on average, returned an impressive 6.6% in September, with its best performance on record dating back to 1997 when it achieved an astounding gain of 86%, marking its first year listed on the stock market. Over the years, 58% of Septembers have seen positive returns for the stock.

AWS: The Cloud Powerhouse

Many perceive Amazon to be an online seller of almost everything. However, Amazon Web Services (AWS) has been experiencing rapid growth, generating most of the profits. AWS provides cloud computing solutions that have been crucial in boosting Amazon’s profitability. In the first half of 2023, AWS recorded a 14% increase in sales, reaching a huge 43.5 billion. Although this growth rate is slower compared to previous years, including a 29% growth rate in 2022, it still outpaces the North American and international markets. AWS contributed to 17% of Amazon’s first-half sales but accounted for over 84% of operating profits. Nevertheless, the unit’s income declined from $12.2 billion to $10.5 billion.

Competition in the Cloud

In the ever-competitive cloud computing landscape, Amazon’s major rivals include Microsoft’s Azure and Alphabet’s Google Cloud. Recent quarters have seen Azure and Google Cloud expanding at a faster pace than AWS. Azure and other cloud services experienced a 26% increase in top-line revenue, while Google Cloud achieved a 28% increase. AWS, on the other hand, reported a 17% sales increase in the second quarter. While AWS maintains a respectable growth rate, Amazon’s management has acknowledged that the business has faced challenges as customers have become more cautious.

Amazon’s Fastest Growing Markets

The fastest-growing markets for Amazon are Brazil, Mexico, and Australia. In three years, Amazon’s web traffic has almost tripled in Brazil, while it more than doubled in Mexico and Australia.

Amazon’s other markets such as its core markets, the U.S., Germany, Japan, the U.K., and India show little growth in web traffic, probably because most of their growth occurs on mobile, where customers choose to use the Amazon app. 40-50% of all internet purchases are currently made via mobile devices, and this is increasing quickly.

Brazil, Mexico, and Australia are growing on mobile too, so their web growth is significant when compared to the other Amazon markets. It is growing even faster in Turkey, the Netherlands, and Singapore. According to web traffic estimates from SimilarWeb, Amazon.com.br in Brazil saw 150 million visitors in February, a significant increase from 50 million three years earlier. In October 2017, Amazon launched a marketplace there, and in January 2019, it began conducting retail business. While it has surpassed the rest of the competitors, it still behind Mercado Libre, the market leader in Latin America.

Latin America has the world’s fastest-growing e-commerce market, which explains why Amazon’s websites in Brazil and Mexico are outperforming. Latin America is growing to be a key location for Amazon with launches in Colombia and Chile as well as an unplanned launch in Argentina.

Amazon’s Challenges

Amazon’s retail empire boasts an extensive reach, selling products both online and through physical stores. The company has established a strong reputation for offering low prices, convenience, and quick delivery. However, profitability in this segment remains a challenge. In the second quarter, Amazon’s North American and international segments reported sales grow of 11% and 10%, reaching $82.5 billion and $29.7 billion, respectively. Despite this growth, North America posted a profit of only $3.2 billion, while the international segment incurred a loss of $895 million.

Recognising the challenge posed by rapid expansion, management has been actively addressing profitability by implementing cost-cutting measures. During the most recent period, total operating expenses increased at a slower pace than sales. Keeping a watch on expenses is crucial, given the company’s prior history of aggressive hiring and expansion.

Valuation and Future Growth

Since the beginning of the year, Amazon’s stock price has surged by 58% surpassing the S&P 500’s gain by four times. This substantial increase has led to a richer valuation, with the company’s shares selling at a forward price-to-earnings (P/E) ratio of over 61, in contrast to about 40 in January. Although this higher valuation could be justified by Amazon’s cost cutting efforts and the potential for profit growth at AWS, the market reflects a high degree of optimism regarding the company’s rapid future growth. If these expectations are not met, shareholders may face a significant decline in the stock price.

Conclusion

The growth of Amazon from a small online bookstore to a global tech powerhouse is a testament to its flexibility, innovation, and constant pursuit of customer satisfaction. Amazon continues to redefine the future of technology, retail, and cloud computing even as it navigates the ups and downs of the stock market and faces competition in its different business sectors. The months ahead will be crucial in determining whether Amazon can maintain its impressive winning streak and continue to chart its own course. As history has shown, Amazon defies conventional market trends and sets new ones.

Disclaimer:

This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.

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