Understandably, some investors are concerned about buying stocks when they are at record highs. While it may seem like a stock is vulnerable to a decline at those levels, it’s best to look at the bigger picture. If it’s a quality company, the stock should continue to appreciate in value over the long term.
Amazon (NASDAQ: AMZN) recently hit a new all-time high in early May, but has since fallen a few percentage points. Still, I think Amazon stock is a great buy right now. This is why.
The companies are all enjoying incredible success
As a company, Amazon has been firing on all cylinders. It divides its operations into three divisions: North America, International and Amazon Web Services (AWS). In previous quarters, at least one of the three major segments was not performing well, but that is not the case now.
Amazon’s e-commerce side, which is geographically split, is much broader than its online store. It also includes fast-growing segments such as third-party services, advertising services and subscription services. In fact, Amazon’s online shopping segment only grew 7% year-over-year when all regions were combined. However, these other segments helped North American and international sales grow 12% and 10%, respectively.
While that is respectable growth, the gains in these divisions were outliers. The North American segment delivered nearly $5 billion in operating revenues (up 455% year-over-year), and the International segment posted its first operating profit ($903 million) since the second quarter of 2021.
This is evidence that Amazon’s efficiency focus continues to have a huge impact and will lead to higher profits in 2024 if they stay on their current path. Should Amazon’s trajectory continue, 2024 will be an exciting year on the commercial side of the business.
AWS is back in growth mode after a tough 2023
While the commercial side of the business generates most of the revenue, the AWS cloud computing business delivers the profits. In 2023, AWS was struggling as its customers were focused on optimizing their spend. According to management, this trend is largely over and the new workload is much greater than the decreasing one.
In the first quarter, AWS revenue rose 17% to $25 million, the highest total revenue in the cloud computing industry. This growth rate is the fastest since the fourth quarter of 2022. Higher revenue also dramatically increased AWS’ operating income, which rose 84% to $9.4 billion.
These numbers clearly show why Amazon is reaching new all-time highs. Sales have increased by double digits and operating income is also increasing incredibly quickly. This combined means a stock will deliver more all-time highs if its success continues into the second quarter and beyond.
Amazon stock is trading at a premium
However, a disadvantage may be the stock valuation. Amazon is trading at a high valuation if you use the price-to-earnings ratio (P/E).
Amazon stock is difficult to value because profits are rising rapidly due to efficiency improvements combined with strong sales growth. As a result, the price-to-earnings ratio is a bit more of a shot in the dark than most investors would like.
Still, I think investors can confidently buy Amazon at this valuation, as analysts believe Amazon will only generate earnings per share of $4.53 over the next twelve months. In the first quarter alone, Amazon produced $0.98 per share, and the first quarter was historically one of Amazon’s weakest quarters. As a result, I think the forward price-to-earnings ratio of 40 is a conservative estimate, and the stock is actually much cheaper than that.
Even though Amazon recently set a new record, I’m confident it can continue to rise even further in 2024.
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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. Keithen Drury has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
Amazon Stock just hit a new all-time high. This is why I still buy. was originally published by The Motley Fool
