Why Investors Are Bullish on Amazon

April wasn’t the best month for stocks, but for the most part, it wasn’t due to struggles by the Magnificent Seven stocks. Most of them have performed well, including Amazon (NASDAQ:), which reported excellent first-quarter earnings on Tuesday after the closing bell.

The e-commerce and cloud-computing leader surged 3% in morning trading on Wednesday and now has gained some 19% year to date. Amazon easily bested earnings expectations with gains driven by its cloud business, Amazon Web Services (AWS).

However, the big story for investors was the company’s continued push into artificial intelligence (AI).

Healthy Margin Expansion

Overall, Amazon generated $143 billion in revenue in the quarter, a 13% increase over the same quarter a year ago.

Net sales in North America climbed 12% to $86 billion, while sales in international markets jumped 10% to $32 billion. AWS recorded the largest sales spike, with revenue up 17% year over year to $25 billion.

Amazon posted net income of $10.4 billion or 98 cents per diluted share for the first quarter, up from $3.2 billion or 31 cents per diluted share in the first quarter of 2023. That includes a pre-tax valuation loss of $2 billion from the company’s investment in Rivian (NASDAQ:) Automotive, compared to a pre-tax valuation loss of $500 million from the investment in the first quarter of 2023. Amazon is the largest shareholder in the electric-truck maker.

While generating solid revenue, Amazon is also seeing its expense-management initiatives start to pay off, as its operating margin reached an all-time high of 10.7%, up from 7.8% in Q4 and 3.7% in the first quarter of 2023.

As a result, the company’s operating cash flow surged 82% to $99 billion for the trailing 12 months, and its free cash flow spiked to $50 billion from an outflow of $3.3 billion for the trailing 12 months that ended March 31, 2023.

The improved cash flow is a big reason why Amazon is making a bigger bet on generative AI (GenAI) — where CEO Andy Jassy sees more growth opportunities.

“Our AWS customers are also quite excited about leveraging GenAI to change the customer experiences and businesses. We see considerable momentum on the AI front, where we’ve accumulated a multi-billion-dollar revenue run rate already,” Jassy said on the earnings call.

In turn, the high demand for GenAI is expected to “meaningfully increase” Amazon’s capital expenditures in 2024, which should drive future growth in AWS.

“The more demand AWS has, the more we have to procure new data centers, power and hardware. And we don’t spend the capital without very clear signals that we can monetize it this way. We remain very bullish on AWS,” Jassy added.

Analysts are Bullish

Amazon also provided guidance for the second quarter, predicting modest gains. The company is targeting net sales of between $144 billion and $149 billion, up 7% to 11% year over year and slightly higher than the $143 billion recorded in Q1.

Operating income is expected to fall between $10 billion and $14 billion, compared with $7.7 billion in the second quarter of 2023 but down from $15 billion in Q1. The drop is due in part to a seasonal step-up in stock-based compensation expense. However, in the long term, Amazon expects operating income and cash flow to increase from what it anticipates as higher returns on its invested capital.

Analysts pretty much across the board raised their price targets for Amazon, becoming more optimistic about its improving cash flow and financials and plans to increase its capital expenditures on AI than they were in its Q2 outlook.

JPMorgan Chase (NYSE:) was one of the firms that raised its target for Amazon, bumping it from $225 to $240. In the AI arms race, JPMorgan analyst Doug Anmuth is bullish on Amazon’s plans to ramp up its capex spending on AI, where he sees huge growth potential.

Amazon’s median price target is $215 per share, which is a 23% increase over the current price. The company is expensive at 66 times earnings, so that is a bit of a concern. While its long-term prospects are excellent at this valuation, I’d be a little cautious about jumping in right now, given the near-term outlook and an uncertain macro environment. Investors may want to watch for the dip and jump in then.