While Amazon (AMZN) stock is now considered a Magnificent Seven slacker, amid heated debates on AI’s impact on its cloud-computing business, one analyst argued that Wall Street is overlooking a key part of the tech giant’s business.
“Over the past five years, Amazon has built the third-largest ad business in the world, behind only (Facebook parent) Meta and Google, which are 20 and 25 years old, respectively,” Needham analyst Laura Martin wrote in a client note. “Many investors miss the importance of advertising to the Amazon story, because ad revenues are (less than) 10% of total Amazon sales.”
Amazon advertising revenue has grown more than 20% annually since 2019, Martin said, twice the pace of Amazon’s overall sales growth. Amazon’s “unique value proposition is its ability to target ads at high-intent shoppers at the moment of purchase,” Martin wrote.
Amazon Web Services gets a lot more attention because it has long been the profit-driver for the tech behemoth. It’s also in focus because generative AI models require huge amounts of cloud resources. Amazon is the top cloud provider by revenue but it faces strong competition for AI-related business from Microsoft (MSFT), Alphabet’s (GOOGL) Google and Oracle (ORCL)
“We agree with the narrative that the cloud business will be Amazon’s key upside growth driver over the three- to five-year time frame,” Martin wrote. “However, in the one- to three-year time frame, we think Amazon’s ad business is more important to ROICs (return on invested capital). Amazon’s cloud business is responsible for more than 80% of Amazon’s $100 billion (estimated) capital expenditures in 2025, has 50% lower margins than ad revs, and has many large-scale global competitors. None of these negatives are true for the advertising business.”
Amazon Stock: Near 200-Day Moving Average
Martin rates Amazon stock a buy with a price target of 265.
Amazon stock was trading roughly flat at 220.62 in recent action on the stock market today.
The past two months have been a slog for Amazon, with shares falling 2% overall in August and 4% in September. Tariff fears weighed on the stock earlier this year. But its latest slump started with Amazon’s Q2 results in late July. The results showed Amazon’s cloud revenue growth accelerated only slightly in Q2, a letdown for investors compared with stronger performances from cloud rivals Microsoft and Google.
Overall, the stock is trading roughly flat for the year. Shares have been hovering just above Amazon’s 200-day moving average for the past several trading days. Amazon has not traded below that long-term investor support level since early May.
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