Artificial intelligence (AI) is currently dominating the technology sector, and one company that will benefit greatly from this is the leader in e-commerce and cloud computing. Amazon (NASDAQ: AMZN). Roughly halfway through 2024, Amazon shares are up 23%, far surpassing the 15% gain so far this year. S&P500 and the 19% increase in the Nasdaq Composite.
But even in the aftermath of this strong performance, Doug Anmuth of JPMorgan Chase thinks Amazon shares could rise another 28% over the next 12 months.
Amazon’s Cash Flow Empire
Two of the most followed institutional investors are that Berkshire Hathaway CEO Warren Buffett and CEO Cathie Wood of Ark Invest.
Admittedly, Wood and Buffett don’t have much in common when it comes to their investing styles. Buffett’s portfolio is dominated by blue chip companies with consistent cash flows. Wood, on the other hand, often takes positions in companies active in emerging technologies such as genomics, space exploration and various aspects of the tech world.
One stock they both own is Amazon. While those positions are relatively small compared to their other holdings, I’m intrigued that these two have some overlap in their respective portfolios.
One of the reasons I think both Buffett and Wood own Amazon has to do with cash flow. Many growth companies (especially in technology) burn cash for long periods of time in their pursuit of accelerated revenue growth.
Amazon, however, is now generating staggering levels of profit. For the 12-month period ended March 31, the company grew its operating cash flow 82% year over year to $99 billion. What’s more, Amazon’s free cash flow for that period was a whopping $50 billion.
While it’s the company’s robust free cash flow that likely attracts an investor like Buffett, it’s how management invests these excess profits that I think piques Wood’s interest.
These AI investments should not be overlooked
Like many of its big tech peers, Amazon has aggressively pursued all things AI over the past year.
The company’s first major step in this regard was a $4 billion investment in Anthropic, a competitor of OpenAI. Amazon also invests in machine learning start-up Hugging Face. Additionally, in April, the company announced an $11 billion infrastructure project to build data centers in Indiana.
I see all of these moves as pieces of a larger puzzle. All of these assets should play a significant role as the company begins to roll out additional AI capabilities across its ecosystem. Its cloud computing platform Amazon Web Services (AWS) will benefit greatly from these AI investments, as will its existing e-commerce business and its fast-growing advertising business.
Should You Invest in Amazon Stock Now?
While Anmuth’s $240 price target may tempt you to buy Amazon stock, I wouldn’t get too caught up in the details.
Instead, investments in Amazon should be more rooted in the strong belief that AI represents a new frontier for the technology sector as a whole. Furthermore, allocating a position in your portfolio to Amazon would indicate that you are optimistic that the company can emerge as a leader in the AI ​​landscape.
As I’ve indicated in previous articles, given Amazon’s diverse businesses and its ability to leverage AI in its ecosystem, I believe the company will dominate in the coming years.
If you look at the chart above, you’ll notice something interesting about Amazon’s price-to-free-cash-flow (P/FCF) multiple. Namely, the metric rose to excessive levels and then disappeared in 2022 and part of 2023. That’s because Amazon burned cash during this period, rendering P/FCF meaningless.
However, because the company is now generating consistent cash flow, the multiple is starting to normalize. What I find most intriguing about the above trend is that the company’s P/FCF multiple of 43 is roughly half of its 10-year average.
This is hard to believe. Amazon is a much different, larger, and more sophisticated company today than it was a decade ago. However, the valuation trends above would imply that Amazon stock is more fairly valued today at its current price.
Given the long-term tailwinds that AI represents, as well as the company’s numerous investments in this space and the impact they could have on its future prospects, I think buying Amazon stock right now is a no-brainer.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions at Amazon. The Motley Fool holds and recommends positions in Amazon, Berkshire Hathaway, and JPMorgan Chase. The Motley Fool has a disclosure policy.
1 Cathie Wood and Warren Buffett Artificial Intelligence (AI) Stocks to Buy Before It Surges 28%, According to 1 Wall Street Analyst, originally published by The Motley Fool
