It was volatile, but 2023 proved to be a great year for growth stocks. The tech-heavy one Nasdaq Composite Index rose over 35% through early December, almost double the 19% rally S&P 500 seen at that time. Some of the biggest winners were Nvidia And Metaplatformsan increase of 211% and 165% respectively.
Amazon (AMZN 1.63%) The stock posted a respectable result, rising over 70% over the year. These gains were driven by positive factors such as the return to growth in the e-commerce industry and strong demand for its cloud services. But there’s probably more room for this stock to run. Here are some reasons why Amazon could continue its positive momentum into 2024 and beyond.
1. It’s great to have options
It’s not easy for a huge company to grow quickly, but that’s exactly what Amazon is doing right now. Sales rose 11% to $405 billion over the past nine months, adding another $40 billion to sales.
But growth investors should be even more excited about where those profits come from. Amazon’s product sales are recovering well, essentially putting an end to the growth hangover that followed the pandemic’s surge in demand. The company sold over 1 billion items at the start of the holiday shopping season, indicating excellent customer traffic into 2024.
But the services segment is a bigger growth driver and promises to drive the business from here. It currently accounts for about 55% of sales and grew 17% in the first three quarters of the year. It’s a big plus for the company that it has more than one major global industry to target for growth.
2. Shift priorities
Amazon is notoriously stubborn about prioritizing long-term growth over profits. However, the company’s maturity and focus on services sales are helping to change this trend, which is good news for shareholders seeking a better balance between profits and growth.
As the company continued to invest heavily in initiatives like artificial intelligence (AI) and faster e-commerce delivery speeds, Amazon more than doubled its operating profit to $24 billion in recent months.
The company’s cash flow trends point to even greater earnings growth. Free cash flow for the last full year was $21 billion, compared to an outflow of $20 billion in the same period last year. While Amazon will likely continue to spend heavily in areas like shipping and data networks, the company has proven it can be financially prudent at the same time.
3. Fill your shopping cart
Amazon stock doesn’t look too expensive after its rally this year. The share price at the beginning of December is 2.7 times annual sales, which is undoubtedly a record valuation for 2023. However, that valuation is below the nearly five times annual sales that investors paid for the growth stock at the end of 2020. You’re more likely to pay 12x sales if you own them MicrosoftFor example.
Microsoft is far more profitable: operating income is 43% of sales, compared to Amazon’s 5%. As services make up an increasingly larger portion of the company’s business, Amazon’s margins are expected to expand into double digits, likely driving shareholder returns through 2024 and beyond.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Demitri Kalogeropoulos holds positions at Amazon and Meta Platforms. The Motley Fool has positions in and recommends Amazon, Meta Platforms, Microsoft and Nvidia. The Motley Fool has a disclosure policy.