Prediction: Amazon Stock Will Soar After April 29
Key Points
Amazon has climbed 10% this year and trades near a record high.
This is after stumbling earlier in the year amid general headwinds.
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Amazon (NASDAQ: AMZN), along with many other tech giants, sank earlier this year during a difficult environment for growth stocks. Investors worried about the war in Iran as well as direct risks for artificial intelligence (AI) stocks -- for example, the idea that the revenue opportunity could disappoint.
But, in recent days, Amazon has recovered its momentum and gone on to advance. In fact, the stock is up 10% for the year and is trading around its highest ever. Meanwhile, even after these gains, Amazon shares remain reasonably priced, trading at 32x forward earnings estimates -- a couple of years ago, they traded at more than 40x estimates.
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Now, my prediction is that Amazon's gains are far from over -- and this top tech stock will soar after April 29. Let's find out why.
Image source: Getty Images.
Revenue of more than $700 billion
So, first, let's talk about the Amazon story so far. The company has wowed consumers, corporate customers, and investors with all it has to offer over the past several years. As a consumer, you'll probably recognize Amazon as an e-commerce mammoth, offering everything from groceries to mass merchandise and even prescription drugs. The company has a strong presence around the world, and this has helped drive annual revenue to more than $700 billion.
But Amazon's biggest profit driver is its cloud business, Amazon Web Services (AWS). It makes up nearly 60% of Amazon's overall operating income.
Companies of all sizes turn to AWS for a variety of products and services -- and in recent years, they've come to the cloud leader for its AI offerings. This has helped AWS' revenue to explode higher, reaching a $142 billion annual revenue run rate in the latest quarter. Amazon offers customers access to a broad range of AI chips, large language models, and everything they may need for their AI projects.
Though some investors have worried about the level of spending on AI -- by Amazon and other tech giants -- Amazon recently offered a message that should relieve these concerns. The company says that as soon as it makes new capacity available, it's monetizing it -- and demand is high for AI and non-AI services.
Benefiting from investments
It's also important to note that Amazon has a solid track record when it comes to benefiting from its investments, as we can see through its return on invested capital in the chart below. The company experiences periods of spending, then consistently goes on to generate returns.
AMZN Return on Invested Capital data by YCharts
All of this has helped Amazon stock climb over the years, gaining more than 130% over the past three years, for example.
Now, let's consider the potential catalyst coming up on April 29. On that day, after the stock market closes, Amazon will report first-quarter earnings, and investors will be focused on two key elements: the company's comments about AI demand and any new forecasts for spending this year. During the last quarterly report, Amazon said it was targeting $200 billion in capital expenditures to support AWS growth.
AI demand
At the time, this message regarding spending didn't please investors, and the stock dropped more than 5% in one trading session. But I believe investors may take a more positive view this time around as evidence of strong AI demand -- from a wide range of companies in the industry -- has continued to pile up.
Investors also might feel more optimistic after considering Amazon chief Andy Jassy's letter to shareholders, released earlier this month. In that letter, Jassy spoke in detail about Amazon's investment cycle, and how investment in AWS weighs on free cash flow in the near term, then growth more than compensates over time. And he also explained that much of the capex investment this year will be monetized over the coming two years -- so Amazon's spending is linked to customer commitments and isn't done randomly.
With all of this in mind, and considering Amazon's reasonable valuation, investors may be eager to get in on this top tech player -- and that means, following potentially encouraging growth news during the April 29 earnings report, I predict Amazon stock will soar.
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Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
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