Wall Street: the three reasons why Amazon shares could skyrocket in 2024

Amazon presents an excellent first quarter of the year, with shares up around 20%. But investors believe that’s just the beginning. The signature of Jeff Bezos has a lot going for it, making it an excellent investment even after its recent rise.

Analysts argue there are three reasons why it is still a good investment. If you have an interest in stocks, I think these are good points to keep in mind when buying, or at least holding on to, stocks that have already been purchased.

This Friday,Amazon shares they climbed almost 3% (2.9%). This is in addition to the 6% they accumulated in the last month and 46.7% in the last six.

Gross margins are improving

While revenue growth excites investors, at least for some time, they also want to see profits at the end of the day. But profits are limited by one important factor: the gross margin.

Gross profit is what is left after subtracting the costs of goods sold, and is essentially the maximum that profits can be (unless one-time profits artificially inflate profits to even higher levels).

E-commerce businesses have historically had fairly tight margins because their core business model is buying a product and selling it for a little more to make a profit. But amazon found a way to increase its gross margin through other businesses. Because its service divisions now account for more revenue than its store divisions, its gross margin has seen a significant boost recently.

These service divisions include Amazon Web Services (AWS), its cloud computing division; advertising services; services for third-party sellers and subscription services. Of the company’s seven segments, these four were the fastest growing in the fourth quarter.

These types of businesses tend to have higher gross margins. Unfortunately, Amazon does not break out these segments in addition to AWS, but compared to other companies whose core business is related to these types of services, it reveals higher gross margins. So if they continue to grow faster, Gross margins will continue to increase.

This raises the ceiling on what the company’s earnings could eventually be, an exciting prospect for investors.

AWS could recover in 2024

Among its services divisions is AWS, which didn’t have a great 2023. Many customers were optimizing their spending after years of massive expansion. But the division’s main competitors, Microsoft’s Azure and Alphabet’s Google Cloud, did not see that same weakness, So many investors expect AWS to recover in 2024.

Management is also optimistic because it continues to see that cost-control trend decline among its clients, while larger deals with longer commitments grow. As demand grows for artificial intelligence (AI) data collection and model buildings, demand for cloud computing products will only increase. AWS needs to present itself as a mainstream option because Azure and Google Cloud have been doing a much better job.

Stocks are still below previous valuation levels

Amazon is not yet a maximally profitable company. Although it is producing an increasing net incomeCEO Andy Jassy believes he has more cost controls to achieve.

So I will use the price to sales (P/S) ratio to evaluate the company’s valuation, since revenue has been more stable than its net income. Even after the increase in Amazon’s valuation, is still below the levels it was essentially trading at from 2018 to 2022.

This is a great indicator for investors: shows that Amazon could still achieve a higher valuation and not be overvalued from a historical perspective. Combine that fact with the possibility of revenue growth with a better-running AWS, and the stock could have room for more upside based on valuation alone.

All three factors combine to make me feel confident that Amazon stock still has a lot of upside potential in 2024, even with its strong start.