Prediction: This will be Amazon’s next stock move

Predicting the movements of any particular stock is challenging, but historically it has been easier Amazon (AMZN 0.69%) stock. A model emerged years ago showing a strong correlation between Amazon’s price per share and its operating profit.

It might seem that calculating the profits of a business is a simple process. But in reality, there are several ways to look at things. There are widely used accounting methods that take everything into account. But some companies are making long-term strategic moves that are reducing book profits right now. Adjusting for such things can provide a more accurate picture of the company. This is why multiple profit metrics are relevant to investors.

For Amazon, the operating profit metric looks at what the business earns before factoring in other things like interest expense and taxes. Over the past decade, when operating profit rises, Amazon’s stock rises more often than not, and vice versa, as the chart below shows.

AMZN data by YCharts

Over the past few weeks, Amazon’s stock has fallen about 20%, and I’m sure investors want to know what happens next. Well, I would say that the next big move for Amazon stock will be predicted by forecasting the next big move for operating income. And here’s what we can know about it right now.

Where do the profits go?

In the first half of 2024, Amazon had operating income of nearly $30 billion. That’s an incredible 141% increase over the same period in 2023. And it’s worth noting that operating income over the past 12 months is at an all-time high.

As has long been the case, most of Amazon’s operating profit comes from Amazon Web Services (AWS). In the second quarter of 2024, AWS had an operating profit of $10.5 billion, which accounted for 84% of the company’s total operating profit in Q2. So it stands to reason that if an investor can predict what will happen to Amazon’s AWS, they can predict what will happen to overall operating profit.

On that note, I want to start by considering the income potential here. Amazon’s AWS is one of the best cloud computing platforms in the world. Research from Mordor Intelligence, MarketsandMarkets, Grand View Research and Fortune Business Insights predicts compound annual growth for the industry between 15% and 21% through 2028 and beyond.

The point is not which research firm gets it exactly right. The point is that virtually all experts expect double-digit industry growth for a long time, which is a tremendous tailwind for Amazon’s AWS growth.

However, looking at the details of Amazon’s report, AWS’s growth could be about to slow. It does not normally appear in the press release. But in official quarterly filings, the company hedges its remaining performance obligations, much of which are related to AWS. This is essentially future income under the contract. A large quarter-over-quarter increase may signal revenue growth for AWS in the near future.

At the end of the second quarter, Amazon had commitments of $157 billion, compared with commitments of $158 billion in the first quarter. For perspective, this is a decrease of $1 billion compared to an increase of $10 billion in the same period last year. It’s not a sure predictor, but it could signal AWS growth slowing in the near term, even if it has a strong tailwind in the industry.

On the profitability front, Amazon management said it expects its AWS spending to increase in the back half of 2024 compared to the first half, particularly due to ongoing investments in artificial intelligence (AI). AI applications require specific hardware that the company has been buying in recent quarters, and it’s a cost that’s still rising.

These investments could hurt Amazon’s AWS profitability in the coming quarters. Taking all of these things together, Amazon’s operating income may be flat for now.

What it means for Amazon stock

Assuming growth for Amazon’s AWS slows and its AI spending increases, I think it’s fair to assume that the company’s operating profit growth is stalling. It’s important for investors to keep things in perspective — operating profit is at an all-time high and that’s an incredible amount of cash at nearly $55 billion annually. But if growth slows, I expect it to have an impact on Amazon stock.

Over the next year or so, I predict that Amazon’s stock will remain largely where it is today. Note that it’s still up about 15% over the past year, even after a 20% drop from its highs. That’s another healthy recent gain that shareholders should be happy with.

I wouldn’t expect hot near-term gains for Amazon stock. That said, remember that the long-term outlook for cloud computing is still pretty good. So over the next few years, I expect AWS to heat up again, leading to new highs for Amazon stock. It may just be an exercise in patience for shareholders.