Is Amazon's share price primed to soar on advertising and the cloud?

The Amazon (NASDAQ: AMZN) share price has risen 13.5% to $3,153 after last week’s strong earnings sent a wave of relief through tech investors after the recent shocks of Facebook and Netflix. In Q4 results, sales rose 10% year-over-year to $137.4 billion, driven by growth in Amazon Web Services (AWS) and advertising. And while e-commerce sales fell slightly, it was unsurprising as sales figures were being compared to 2020’s pandemic boom.

And overall, quarterly profit nearly doubled year-over-year to $14.3 billion, driven by its investment in EV start-up Rivian, as well as its best-ever Black Friday weekend. And for the year, sales rose 33% to $469.8 billion, driving profits up to $33.4 billion.

And Amazon is up 281% over the past five years. But it’s worth noting that the Amazon share price has been above its current level for much of the pandemic. And even after last week’s results, it’s still below the $3,334 price it commanded at the start of the year.
And with the US Federal Reserve expected to raise interest rates as many as seven times this year, Amazon’s growth could be hit by the increased cost of debt. But tightening monetary policy may also work in its favour, allowing it to acquire decent propositions such as Peloton at bargain prices.

Amazon share price: prime increase

Amazon is not immune to the US’s sky-high 7% inflation rate. CEO Andy Jassy acknowledged the pressure, saying ‘as expected over the holidays, we saw higher costs driven by labour supply shortages and inflationary pressures.’ And ‘these issues persisted into the first quarter due to Omicron,’ with sales growth of 3%-8% forecast for the current quarter. However, Jassy remains ‘optimistic and excited’ for the future, despite these pressures increasing costs by $4 billion in the quarter.

This could be because Amazon is increasing the price of its Prime membership for US customers, with its monthly fee set to rise from $12.99 to $14.99, while annual customers will pay $139, up from $119. This is the ‘first time Amazon has raised the price of Prime since 2018,’ and has been justified by ‘the continued expansion of Prime member benefits as well as the rise in wages and transportation costs.’

CFO Brian Olsaysky accepts that the ongoing cost-of-living squeeze could see some customers unsubscribe from the service, but contends that this wasn’t the case in 2018. And since then, Amazon has tripled the number of Prime Video Originals and increased items available for free shipping by more than 50%. And from September, it will boast a Lord of the Rings original show and become the ‘exclusive home’ of Thursday Night Football, as part of ‘a historic 11-year agreement with the National Football League (NFL).

Advertising and Amazon Web Services

Jassy also highlighted ‘the extraordinary growth of AWS with 40% year-over-year growth (and now a $71 billion revenue run rate).’ Amazon is now working with NASDAQ ‘to migrate its markets to AWS with the goal of becoming the world's first fully enabled, cloud-based exchange.’ And Meta, parent of Facebook, WhatsApp, and Instagram has ‘selected AWS as its long-term strategic cloud provider to accelerate artificial intelligence research and development.’ It appears that Amazon is keeping up with Microsoft and Alphabet as a top player in cloud computing. And by 2026, ReportLinker predicts Cloud’s global market value will double to $947.3 billion.

But Amazon’s under-recognised potential is in advertising. Meta’s share price collapse was sparked predominantly by TikTok encroaching on its market position to purloin daily active users. But CEO Mark Zuckerberg also highlighted ‘Apple's iOS changes and new regulation in Europe, (meaning) less data is available to deliver personalized ads,’ which could cost the company more than $10 billion a year.

But Amazon isn’t reliant on Apple to grow advertising revenue. In fact, Apple reportedly spends $30 million per month on Amazon’s cloud computing services. And while Amazon remains a distant third to Alphabet and Meta, its advertising revenue hit $31 billion in 2021. And in Q4, it rose 32% to $9.7 billion. For perspective, Amazon had an 11.6% market share last year, compared to Alphabet’s 28.6% and Meta’s 23.8%.

But if return on investment falls at Meta, the temptation for advertisers with squeezed budgets to jump ship to Amazon could rise, and the Amazon share price with it.

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