ETFs in Focus as Amazon Joins $2T Club for the First Time

Sanghamitra Saha
·4-min read

Amazon achieved a key milestone on Jun 26, 2024, having topped the $2 trillion market capitalization. This put the tech giant among a select group globally valued at this level, including Microsoft MSFT, Apple AAPL, NVIDIA NVDA and Alphabet GOOGL. Amazon's stock gained 3.9% on Jun 26 to touch a record split-adjusted price of $193.61. The uptick was aided by an AI-led broader tech rally.

Amazon’s achievement puts the spotlight on ETFs like ProShares Online Retail ETF ONLN (24.3% weight invested in AMZN), Consumer Discretionary Select Sector SPDR Fund XLY (22.75% weight), Fidelity MSCI Consumer Discretionary Index ETF FDIS (22.50% weight) and Vanguard Consumer Discretionary ETF VCR (21.89% weight).

Behind Amazon’s Operations and Financials

Amazon reported its most profitable first quarter ever, with a net income of $10.4 billion, marking a considerable improvement from the previous years. The company's stock has benefited from increased investor interest in AI, particularly through its Amazon Web Services (AWS). AWS revenues (18% of sales) rose 17% year over year in Q1 to $25.04 billion, which surpassed the consensus mark of $24.3 billion.

The strong adoption rate of AWS is aiding the company’s cloud dominance. AWS is gaining momentum with customers including Boeing, Geisinger, British Telecom, Jefferies, Meta, Roche, adidas, NXP Semiconductors, National Hockey League, ViacomCBS, Boom Supersonic, MercadoLibre, Western Union, Klarna, Old Mutual, Adobe, and Spotify, to name a few. Improving Alexa skills, along with a strong offering of smart home products, are acting as a tailwind.

The company is gaining considerable momentum with its Prime services, thanks to ultrafast delivery options and a robust content portfolio. Amazon witnessed 11% growth in its subscription services sales, which were $10.72 billion in Q1. The figure beat the consensus mark of $10.68 billion. A robust advertising business is also contributing well.

Growing capabilities in grocery, pharmacy, fintech, healthcare and autonomous driving are some other positives. Apart from being one of the largest e-commerce companies in the world, Amazon’s expanding footprint in offline operations deserves a special mention. AMZN experienced year-over-year growth of 6% in its physical store sales, which were $5.2 billion in Q1. The figure topped the consensus mark of $5.1 billion.

Cash-Rich Amazon Invests in AI: Dividends in Cards?

Amazon’s free cash flow has surged to $50 billion on a trailing 12-month basis, while operating cash flow has skyrocketed 82% over the same time period to $99.1 billion. Amazon currently has a price/free cash flow ratio of 41.2.

Since it is a high-growth stock, Amazon has been investing huge cash into AI-driven initiatives and fintech. The investment emphasis has mainly been on AI models and a chatbot named Q, which Amazon provides to companies using its AWS cloud computing services.

Amazon has already invested $4 billion in the San Francisco-based AI company Anthropic. Plus, Amazon makes and designs its own AI chips to ensure seamless supplies of semiconductors. However, with many of its “Magnificent Seven” peers rolling out dividends lately, Amazon may also kickstart on that move.

Can AMZN Stock Rise Further?

Amazon stock has an upbeat VGM Score of “A.” The stock hails from the Zacks Internet – Commerce industry, which currently ranks in the top 30% out of approximately 250 industries. Because it is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform over the next 3 to 6 months.

The Amazon stock is currently trading at about 42.3 times its forward earnings, higher than the industry average of 24.9X. However, its valuation does not seem overstretched, as earnings are growing faster than its share price.

Price Target

Bank of America analysts raised their price target for Amazon from $210 to $220, suggesting further upside potential of 12%, as quoted on Forbes. Before hitting the milestone, the average price target for Amazon was $221.16, as of Jun 25, 2024 (based on short-term price targets offered by 44 analysts). The forecasts ranged from a low of $140.00 to a high of $246.00. The average price target represented an increase of 18.69% from the closing price of $186.34 recorded on the same day.

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Apple Inc. (AAPL) : Free Stock Analysis Report

Microsoft Corporation (MSFT) : Free Stock Analysis Report

NVIDIA Corporation (NVDA) : Free Stock Analysis Report

Alphabet Inc. (GOOGL) : Free Stock Analysis Report

Consumer Discretionary Select Sector SPDR ETF (XLY): ETF Research Reports

Vanguard Consumer Discretionary ETF (VCR): ETF Research Reports

Fidelity MSCI Consumer Discretionary Index ETF (FDIS): ETF Research Reports

ProShares Online Retail ETF (ONLN): ETF Research Reports

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