Revenue Growth

Amazon shows that fast growth and massive scale can coexist despite the conventional wisdom about the law of large numbers. The company’s revenue base of $280.5 billion five years ago has more than doubled to $638 billion in the last year, translating into an incredible 17.9% annualized growth rate.

Amazon’s growth over the same period was also higher than its big tech peers, Alphabet (16.7%), Microsoft (14.3%), and Apple (8.1%). Comparing the four is relevant because investors often pit them against each other to derive their valuations. When adjusting for these benchmarks, we think Amazon’s price is fair.

Long-term growth reigns supreme in fundamentals, but for big tech companies, a half-decade historical view may miss emerging trends in AI. Amazon’s annualized revenue growth of 11.4% over the last two years is below its five-year trend, but we still think the results were good and suggest demand was strong.

This quarter, Amazon’s year-on-year revenue growth was 10.5%, and its $187.8 billion of revenue was in line with Wall Street’s estimates. Company management is currently guiding for a 6.9% year-on-year increase in sales next quarter. Looking further ahead, sell-side analysts expect revenue to grow 10.5% over the next 12 months, similar to its two-year rate. This projection is healthy for a company of its scale and illustrates the market sees some success for its newer products.

Unless you’ve been living under a rock, it should be obvious by now that generative AI is going to have a huge impact on how large corporations do business. While Nvidia and AMD are trading close to all-time highs, we prefer a lesser-known (but still profitable) stock benefiting from the rise of AI. .

Profitability: The Key Debate

Many investors understand that Amazon’s e-commerce business caps its gross margin, which averaged 44.8% over the last five years. The company lags behind its pure-play tech peers because it sells many commoditized goods online where it must acquire and hold physical inventory.

What the market debates, however, is where Amazon’s long-term operating profitability could ultimately settle. Sure, its five-year margin of 6.4% was weak, but it rose by 4.8 percentage points thanks to leverage on the fixed costs in its consumer-facing businesses and the highly profitable AWS segment becoming a larger portion of its revenue. Our question is if Amazon’s momentum can continue and result in a mid-to-high teen percentage margin somewhere down the line.

The company’s North America segment holds the keys to this answer. Throughout the years, Amazon has made huge investments to not only attract hoards of customers into its ecosystem but also retain them. Some areas of focus in this effort included its unmatched delivery network and video streaming content.

Bulls will argue that Amazon can afford to ease up and begin riding its investments of the last two-plus decades. Wall Street seems to disagree somewhat and is projecting its trailing 12-month operating margin of 10.8% to stagnate in the coming year. Expectations aside, the company’s performance over the last few years supports the higher long-term profitability argument that could potentially lead to earnings and a stock price that follows.

Key Takeaways from Amazon’s Q4 Results

We liked how Amazon beat analysts’ operating profit and EPS expectations this quarter. On the other hand, its revenue and operating income guidance for next quarter both fell short of Wall Street’s estimates. Zooming out, we think this was a decent quarter with mediocre guidance. The latter is weighing on shares, and the stock traded down 3.6% to $230.20 immediately after reporting.

So do we think Amazon is an attractive buy at the current price? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free .