Amazon (NASDAQ:AMZN) is trading near all-time highs because of the company’s financial blowout year. It breached the $190 barrier after being unable to do so at its peak in 2021 and multiple times this year. With Amazon stock above this resistance, the momentum can keep the stock soaring.
However, many are skeptical about Amazon’s valuation. I maintain its rally is justified because of its improving business fundamentals. In addition, I believe that the potential growth from advertising and social commerce are major tailwinds that can increase growth for the company again.
Blowout Quarter 1 2024 Financials Justify Valuation
Amazon stock’s rise this year appears to be backed up by sound business fundamentals. Revenue of $143.31 billion in quarter 1 2024 was up 12.5% year-over-year. Net income was $10.43 billion, a whopping 228.85% YOY increase.
This is due to increased sales in AWS and advertising growth, which I previously talked about. Amazon Web Services is also massively improving margins, which are now 10.7% this quarter compared to 3.7% in Q1 2023, producing over 65% of Amazon’s total operating income. The massive layoffs and other cost efficiencies by management also seemed to pay off.
Amazon laid off 18,000 workers in January 2023 and implemented hiring freezes, one of its most significant job cuts. It’s continued to lay off hundreds of employees in four different divisions.
In addition, Amazon has massively improved its delivery efficiency, increasing the number of items it ships in each box and helping gross margins improve to 49.3% from 46.8%, among other factors.
The stock commands a premium when trading at a 40x forward price-to-earnings (P/E) ratio. However, I’m convinced that it isn’t overvalued because its current multiple is lower than when its stock price was lower.
In the middle of 2023, Amazon’s share price grew while the forward P/E ratio started declining. If Amazon hadn’t massively increased earnings, we would expect its P/E ratio to remain at similar levels or even increase because the share price grew quickly.
We are essentially seeing Amazon stock price return to its 2021 levels, but this time, it is backed up by solid earnings, which makes me believe that this current rally is justified.
Prime Day Historically Brings Good Performance
Prime Day is Amazon’s equivalent of Black Friday, where prices on the site slash and sales boom in volume. Historically, the stock usually does well in July because of anticipation of the event and because it has broken sales records from the previous Prime Day event since 2015.
This year, Prime Day is from July 16 to 17, while Q2 2024 earnings come out on July 24, making July a big month for the company’s stock price.
Data shows that from 2015 to 2022, Amazon’s stock rose an average of 4.4% the month after the event ended. For 2023’s Prime Day, which was held between July 12-13, just by looking at Amazon’s stock chart, we can see that from the end of June to the beginning of August, its stock price increased by roughly $130 per share to roughly $140 per share.
Advertising Will Be A Huge Revenue Generator
I explained before that advertising is a game changer for Amazon since the platform reaches over 400 million users every year, with user shopping data that advertisers are drooling to have.
In Q1 2024, advertising revenue surged by 24% YOY, outpacing competitors like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). Prime Video moved to ads early this January, predicting to generate $3 billion in revenue this year and up to $7 billion in 2026.
Amazon Stock Will Benefit From the Creator Economy
The creator economy is loosely the industry surrounding monetized social media content. With the rapid growth of social media and people’s trust in social media influencers, affiliate marketing is a fast-growing market.
Social Commerce is a $1.2 trillion opportunity and is supposed to triple from 2021 to 2025. Influencer traffic is already responsible for 37% of Amazon’s traffic.
Amazon is now building its social media platform called Amazon Inspire, which is similar to ByteDance’s TikTok but fully integrated with Amazon’s shopping.
On the date of publication, Michael Que held a SHORT position in Amazon.com stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.