Investors may be wondering if it’s time to buy Amazon (NASDAQ: AMZN) has come and gone. Although the company played a key role in pioneering the e-commerce and cloud computing industries, its market capitalization now stands at approximately $2.1 trillion. Given its sheer size, investors might reasonably wonder whether relatively smaller growth stocks would be better investments.
However, further research shows why investors shouldn’t write off Amazon just yet as a mature, slow-growth stock. Three factors indicate that the company can still deliver competitive returns despite its size.
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First, investors should understand that they shouldn’t look to Amazon’s online sales business for rapid expansion. With that part of the business registering single-digit percentage revenue growth in recent quarters, it likely won’t lead to gains in Amazon stock.
Amazon Web Services (AWS) is a different story. It remains the leader in the cloud infrastructure sector. Furthermore, its ability to apply artificial intelligence (AI) and run AI workloads makes it play a crucial role in today’s technology industry.
Additionally, through the first three quarters of 2024, revenue grew 18% to $79 billion, surpassing the company’s overall growth of 10%. Most importantly, 62% of Amazon’s revenue came from AWS, demonstrating why this is perhaps the most crucial segment to the company’s growth story.
Yet this is probably not the only part. Within its North American and International segments, it operates digital advertising businesses, third-party merchant services and subscription services that are growing revenue at double-digit percentages. While Amazon doesn’t disclose the individual operating income of these companies, they likely contribute to the company’s growth.
Not surprisingly, the benefits of Amazon’s growth business extend to its balance sheet. The company’s liquidity stands at a whopping $88 billion, a level matched by few other companies.
Granted, Amazon’s $58 billion in long-term debt reduces that liquidity somewhat. Yet this largely concerns debts with low interest rates and whose terms are decades in the future. So you can assume that Amazon will likely earn returns from its stock of cash and equivalents in excess of the interest rates it pays, which should further strengthen its balance sheet.
Additionally, Amazon generated $48 billion in free cash flow over the past twelve months. Cash flows at those levels give it enormous flexibility to invest in its businesses or buy new ones without affecting its liquidity. Amazon can therefore afford to maintain its leading positions in cloud and AI, while continuing to innovate in the activities related to e-commerce.
While the company continues to innovate, its valuation is a sign that the company has matured. Amazon stock has historically traded at high price-to-earnings ratios as it either suffered losses or accepted reduced profitability to invest more capital in its businesses. So investors who are used to Amazon trading at price-to-earnings ratios between 50 and 120 may be surprised to find that its earnings multiple has fallen to around 43.
Moreover, this happened at a time when the company is reaping the benefits of its investments. In the first nine months of 2024, the company’s net profit was $39 billion, almost double the $20 billion profit in the same period last year.
Analysts believe net profit growth will slow to 20% by 2025. Still, given Amazon’s history of high valuations, investors may want to take advantage of today’s lower earnings by adding shares.
Ultimately, instead of seeing Amazon’s huge market cap as a reason to treat it as a value stock, investors should continue buying Amazon for growth.
Despite its overall size, Amazon includes AWS and many relatively smaller growth companies that can maintain double-digit revenue growth. Plus, the staggering liquidity and free cash flow should help keep these businesses and any future ventures the company pursues alive.
Finally, Amazon’s valuation has fallen from past price-to-earnings ratios. With revenue and earnings growth expected to remain robust, growth investors can likely still beat the market by buying and holding Amazon stock.
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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. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
The Bull Market Continues to Grow: 3 Reasons to Buy Amazon Stock Like There’s No Tomorrow, originally published by The Motley Fool
