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Is It Too Late to Buy Amazon Stock?

The stock market’s gains over the past year and a half have left many investors smiling. From the end of 2022, the S&P 500 has increased by more than 37%. But that also puts investors in a difficult situation as they try to determine whether this momentum will continue.

For example, Amazon (AMZN -0.38%) has been a standout performer, with the share price rising approximately 110% over this period. Have investors gotten too carried away in terms of how they value stocks? While it’s fun to talk about stock prices, knowing Amazon’s business, prospects, and valuation will help you determine whether or not you should buy the stock now.

Image source: Getty Images.

Grow your key business

Many people think that Amazon is primarily an online retailer, although it also has physical stores. But the company generates most of its profits from its cloud computing segment, Amazon Web Services (AWS).

Last year, AWS produced operating revenue of $24.6 billion, two-thirds of the company’s total operating revenue. Additionally, AWS’s 27.1% operating margin in 2023 was much higher than the roughly 4% margin generated by its North American retail segment. And its international retail segment failed to produce a profit last year.

AWS revenue growth remains strong. In the first quarter, the segment’s gross revenue increased 17% year over year to $25 billion. Its size comes with certain advantages, including the ability to build and maintain data centers. And AWS benefits from entities that increasingly rely on massive amounts of data. According to Statista, in the first quarter, global cloud spending increased to $76 billion. And according to Synergy Research Group, the cloud market is growing at a rate of 21% annually.

Amid this good news, there is a potential problem that investors should pay attention to. AWS continued to lead the cloud infrastructure space in the first quarter with a 31% market share, but that was down one percentage point from a year ago. Its two biggest competitors, microsoft and Alphabethad market shares of 25% and 11%, respectively.

Other businesses

Amazon’s North American and international segments continued to produce good sales growth. In the first quarter, the North American segment saw a 12% increase in revenue, while international growth was 11% (both figures exclude the impact of currency fluctuations).

Profitability improved significantly, which management attributed to higher unit sales and advertising revenue. North American segment operating income was $5 billion versus $898 million in the prior-year period, and the international segment swung to a profit of $903 million from a loss of $1.2 billion. millions of dollars.

Advertising services continue to be a strong growth driver. Revenue from that source has been growing at more than 20% for several consecutive quarters, including 24% in the latest period. Thanks to the wide reach of Amazon’s online platforms and the Prime subscription service, advertisers who buy space on it can target specific audiences. Your advertising business has the potential to continue growing into a major profit center in the future.

Richly valued

With all of Amazon’s success, its long-term investors have been richly rewarded and the stock is not cheap as a result. The stock is trading with a price-to-earnings (P/E) ratio of 50, almost double that S&P 500The proportion of 27.

That is not necessarily bad. But it does mean that the market has already priced in high expectations for continued growth. Any slowdown in that expansion will likely impact the share price as the P/E contracts manifold.

Things have been going well for Amazon and AWS has good long-term prospects. But I wouldn’t buy additional shares of the company right now, given its rich valuation.

Alphabet executive Suzanne Frey is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Alphabet, Amazon and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

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