Cathie Wood, CEO of Ark Invest, and Berkshire Hathaway CEO Warren Buffett are two investors who are prominent in the financial media. However, the underlying reasons for the intense scrutiny of Wood and Buffett couldn’t be more different.
Wood invests in growth stocks and often touts the potential of emerging technologies or even speculative opportunities that have yet to reach critical scale. In contrast, Buffett focuses on concrete fundamentals such as cash flow, earnings power and steady growth over a longer term.
But despite these differences, Wood and Buffett do share some overlap between their respective portfolios. Both investors have positions in it Amazon (NASDAQ: AMZN). Below, I’m going to outline why acquiring Amazon stock now looks like a lucrative opportunity as 2025 approaches.
With 2025 just around the corner, investors are going through the usual motions of rebalancing their portfolio: taking profits on stocks that are on the rise and reallocating those gains into opportunities that could be primed for further gains.
In my view, Amazon is one of the best-positioned artificial intelligence (AI) stocks for next year. While it’s best known for its e-commerce marketplace and cloud computing platform, the company also has a start-up subscription business (Amazon Prime), a streaming service (Prime Video), and an advertising business.
To me, all of Amazon’s major revenue drivers are poised for significant growth in the fourth quarter. In recent months, companies have adjusted their financial forecasts and budgets for next year as consumers rushed to complete their holiday shopping.
When Amazon reports fourth-quarter earnings sometime in early 2025, I wouldn’t be surprised to see notable increases in Amazon Web Services (AWS) revenue as companies double down on AI roadmaps, as well as an increase in e -commerce and subscription segments. fueled by year-end purchasing patterns.
What makes Amazon so attractive beyond its diverse ecosystem and multiple revenue streams is its profitability.
Over the past year, Amazon has significantly accelerated its free cash flow generation. As a result, the company has been able to strengthen its balance sheet – which boasts a cool $87 billion in cash and equivalents – and reinvest excess profits into opportunities in high-growth areas such as AI and streaming.
Two short-term catalysts that I think are being overlooked include a new streaming series featuring YouTube’s biggest star (MrBeast) and continued investment in AI unicorn Anthropic, which is becoming a crucial pillar and bellwether for AWS.
Amazon can be a challenging company to value. Because many of its businesses are vulnerable to macroeconomic factors such as inflation or interest rates, Amazon’s growth trends fluctuate dramatically every now and then.
For this reason, valuation methods such as price-to-earnings ratios (P/E) or price-to-sales ratios (P/S) may not be the most optimal to use. Instead, I want to evaluate Amazon by studying its price to free cash flow (P/FCF) ratio.
As the chart above illustrates, Amazon’s P/FCF of 57 is significantly lower than its 10-year average of around 81. I find this discount intriguing because Amazon is a much larger and more diversified company today than it was a decade ago. Additionally, the company is uniquely positioned to leverage AI in ways that many of its competitors cannot achieve, given the size of Amazon’s ecosystem.
To me, Amazon shares are an outright bargain right now and represent an attractive buying opportunity for investors with a long-term horizon.
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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 and Berkshire Hathaway. The Motley Fool has a disclosure policy.
1 Dirt Cheap Cathie Wood and Warren Buffett Artificial Intelligence (AI) Stocks to Buy By Hand Before the Year Ends was originally published by The Motley Fool
