Is Amazon Stock Primed to Keep Soaring or is a Pullback Ahead?

Fears that stocks are becoming overvalued led to a broader selloff on Tuesday, especially among the tech-centric Nasdaq.

While caution is setting in, investors may be looking for a better opportunity to buy Amazon AMZN stock, which has seen strong momentum since crushing its Q3 expectations last week and announcing a strategic partnership worth $38 billion to power OpenAI’s workloads using Amazon Web Services (AWS).

The expansion of AWS cloud services has supported the tech giant’s e-commerce performance, with Amazon capitalizing on strategic investments in robotics as well. Additionally, Amazon has introduced plans to expand its streaming services and boost advertising revenue.

Recently hitting an all-time high of $257 a share (post-split basis), let's see if Amazon stock is primed to keep soaring or if a steeper pullback is in the cards after AMZN fell nearly 2% in today’s trading session.

Amazon’s Hyperscale Growth & E-Commerce Expansion  

Hyperscale growth has fueled Amazon’s cloud services, with AWS providing the largest scalable computing environments for AI, large data, and cloud-native applications. Of course, AI infrastructure investments have played a significant role in doing so, including Tranium and Inferentia, Amazon’s custom AI chips.

Despite seeing slower growth during Q3 than Microsoft’s MSFT Azure and Alphabet’s GOOGL Google Cloud, AWS sales were up a very respectable 20% to $33 billion compared to Azure’s $26.8 billion and Google Cloud’s $15.2 billion.

Furthermore, Amazon has highlighted investments in generative AI and robotics as a catalyst for both customer experience and operational efficiency regarding its core e-commerce business. Notably, Amazon’s North America e-commerce segment sales rose 11% during Q3 to $106.3 billion, with International sales jumping 14% to $40.9 billion.

Prime Video & Advertising Growth

Amazon's subscription services segment revenue most recently increased 11% YoY, which includes Prime Video, Amazon Music, and other digital content subscriptions. More intriguing, Amazon announced it will be launching a limited ad tier for Prime Video in Q4. This is expected to create a new high-margin revenue stream similar to Netflix NFLX and Disney’s DIS Disney+.

Including Prime Video, Amazon’s Q3 advertising revenue soared 24% YoY to $17.7 billion. Although Amazon hasn’t disclosed whether Prime Video is independently profitable, it's currently the second-largest global streaming platform behind Netflix, with over 200 million subscribers.

Amazon’s Revenue & CapEx Guidance

Signaling strong expectations for the holiday shopping season and continued cloud momentum, Amazon expects Q4 sales to reach another quarterly record of $206 billion- $213 billion after Q3 sales hit a quartelry peak of $180.16 billion. 

Aiming to meet growing demand for AI and cloud services, Amazon CEO Andy Jassy confirmed plans to double capacity by 2027, with a focus on data centers, power, and custom chips.

Amazon now expects to spend a new peak of around $118 billion on capital expenditures in 2025, compared to previous forecasts of $105 billion, with the tech giant’s CapEx hitting an all-time high of over $75 billion last year. 

Monitoring Amazon’s Valuation

Most appealing to Amazon’s expansive sales growth is that AMZN has the cheapest forward P/S ratio among its Mag 7 big tech peers at 3X, with the next closest being Alphabet at 8X. At 35X forward earnings, Amazon is in the middle of the pack as it relates to the Mag 7, but its double-digit EPS growth justifies a modest premium to the benchmark S&P 500’s 26X.

Conclusion & Final Thoughts

Amazon stock is shaping up to be one of the most appealing buy-the-dip targets if the opportunity is presented, as it’s a noteworthy reminder that AMZN previously traded over $2,000 a share before its 20-1 stock split in 2022.

That said, it wouldn’t be surprising if the rally in Amazon stock regains momentum, with AMZN currently sporting a Zacks Rank #2 (Buy) following its strong Q3 report and the announcement of a lucrative partnership with OpenAI.  

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This article originally published on Zacks Investment Research (zacks.com).

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