Amazon’s Low Valuation Belies Progress It’s Making on Multiple Fronts

 By Larry Ramer

Amazon’s (NASDAQ:AMZN) third-quarter results, reported on Oct. 31, show that the company is continuing to make major strides in many areas, including AWS, AI, e-commerce, and Pharmacy. 

Also noteworthy is that the conglomerate could benefit significantly from its emerging chip-making business, while its valuation is quite low from a historical perspective.

AWS Shows Serious Acceleration

The revenue of Amazon’s AWS unit jumped 19.1% versus the same period a year earlier to $27.45 billion. That represented a meaningful acceleration from the 18.7%, 17,2%, and 13.2% gains that the unit generated, respectively, in the previous three quarters. 

AWS benefited from significant strides in both its cloud and AI businesses. On the cloud front, AWS made new deals with many major companies, including Nvidia (NASDAQ:NVDA), Booking.com (NASDAQ:BKNG), Sony (NYSE:SNE), Toyota (NYSE:TM), and T-Mobile (NASDAQ:TMUS), CEO Andy Jassy reported on the company’s Q3 earnings call.

He noted that Nvidia had picked AWS to support its R&D supercomputer.  Given Nvidia’s huge profile and tremendous cash stockpile,  that win is certainly a major feather in Amazon’s cap. 

Turning to AI, Jassy reported that the technology has become “a multi-billion dollar business that's growing triple-digit percentages year-over-year and is growing three times faster at its stage of evolution than AWS did itself.” 

Jassy also noted that Amazon had “released nearly twice as many machine learning and GenAI features as the other leading cloud providers combined” in the 18 months heading into the Q3 report. Further, he reported that Amazon Q, the company’s Generative AI-powered assistant for software development and data analysis tool, had saved AMZN  “$260 million and 4,500 developer years” when it was migrating applications to a new version of Java. 

Those metrics certainly bode well for Amazon Q’s attractiveness to other companies. 

E-Commerce Was Mixed Bag

E-commerce was more of a mixed bag, but there was still a great deal to like about the unit’s growth. In North America, the unit’s net sales climbed 8.7% YOY to $95.5 billion, while its operating income advanced an impressive 30% YOY to $5.66 billion. However, the  unit’s YOY revenue increase did slip to 8.7% in Q3 from 9.1% in Q2 and 12.3% in Q1. 

But on the international side, the company’s e-commerce sales rose 11.7% YOY, representing a major increase from the 6.5% and 9.7% gains generated in Q2 and Q1, respectively. Meanwhile, the segment generated operating income of $1.3 billion versus an operating loss of $95 million in Q3 of 2023. 

The unit volume of the company’s combined e-commerce business increased 12% YOY last quarter. 

Jassy noted that more than 40 million customers had received free same-day delivery in Q3, representing a 25% YOY gain. The fact that a large number of Amazon;s customers are receiving free same-day delivery is likely making the company’s e-commerce business more attractive to a higher number of consumers. 

Pharmacy Growing ‘Really Quickly’ 

On the pharmacy front, Jassy divulged that Amazon intends to launch the business in 20 additional cities in the U.S. The fact that the company intends to take that step leads me to believe that Pharmacy is continuing to perform well. Otherwise, I don’t think that the firm would expand it to such a large extent, as the move likely requires significant investments.  On the Q2 earnings call, held in July, Jassy had said that the Pharmacy business had “grown really quickly.” 

Meanwhile, the conglomerate plans to unveil new, custom AI chips next month. Known as Trainium 2 chips, the products will be used to develop large AI models. And boding well for their outlook, they are already being tested by a number of firms, including prominent AI startup Anthropic and Deutsche Telekom. 

Amazon is touting the chips as an “alternative” to Nvidia’s offerings. Of course, if Amazon’s chips generate even 5% of the revenue of Nvidia’s semiconductors, they will move the needle positively for AMZN stock. 

Valuation Nears Decade Low

Amazon’s current enterprise value to EBITDA ratio of 20 is much lower than the EV/EBITDA ratio of 43 that it reached in July 2018. And in July 2020, the stock’s EV/EBITDA ratio was 39. Even in April 2022, the metric came in at 22.9. And its median EV/EBITDA ratio over the past decade is 30. 

This data indicates that Amazon stock is significantly undervalued at this point and likely to rise much further in the long term.

Disclaimer: The author holds a long position in AMZN at the time of publication. The information provided in this article is for educational and informational purposes only and should not be construed as investment advice. Always conduct your own research or consult with a licensed financial professional before making any investment decisions. Past performance is not indicative of future results.

Larry Ramer is currently ranked 274 out of 30,171 financial bloggers analyzed by TipRanks, with a 15.1% return on his buy and sell ratings. He has been a long-time contributor to InvestorPlace, Seeking Alpha and Fintel.io. He is one of the founding contributors to this newsletter. 

He focuses on contrary investing and specializes in the renewable energy and consumer discretionary sectors. Among his highly successful, contrarian picks have been Plug Power, Exxon Mobil, solar stocks, and airline stocks. On the downside, he was an early predictor of the collapse of cryptocurrencies, marijuana stocks, Ocugen, and Meta Platforms.