Amazon (AMZN) is a high-quality blue chip stock poised to deliver long-term value. In this article, I will detail the investment thesis for AMZN, which I believe is one of the best growth stocks to invest in for the long term. Amazon is known for its e-commerce business but is also involved in AI, cloud computing, digital streaming and advertising, and more. When people shop online, “check for a deal on Amazon” is just like “Google it,” which shows how the company’s brand is now synonymous with online shopping.
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I am bullish on Amazon because of its strong fundamentals and its long-term growth prospects in cloud computing and AI.
Amazon’s Solid Fundamentals Will Help it Continue Compounding
Central to my bull thesis for Amazon is its strong fundamentals. Even after becoming a trillion-dollar empire, Amazon continues to compound. In the Fiscal second quarter of 2024, Amazon’s revenue grew by 10% year over year to ~ $148 billion. A major chunk of this growth came from its lucrative AWS business, which I will discuss later. Its net income grew impressively during the quarter and was $13.5 billion, more than double the $6.7 billion figure in the same period last year.
Additionally, Amazon continues to mint cash. For the trailing twelve months (TTM) ending June 30, 2024, Amazon generated $108 billion in cash from operations, up 75% year-over-year. Amazon’s CapEx was $30.5 billion in H1 2024, and it expects this number to be higher in H2 2024 because it needs to invest in cloud infrastructure to support its AI customers’ needs. As long as AWS grows more than the company’s CapEx, I do not believe investors should be concerned. In FQ2 2024, AWS revenue grew 19% yearly to $26.3 billion.
Therefore, Amazon’s fundamentals are clearly solid, and even after generating hundreds of billions in sales and tens of billions in profits, the company’s growth hasn’t plateaued. Over the past 10 years, Amazon’s sales have grown at a CAGR of 22.1%, and its net income has compounded to 73.4%. While we could see growth slowing down a little from here, since it’s not sustainable to grow at high rates for long, Amazon can continue to compound for several years, given its promising AI opportunity.
Amazon’s AI Opportunity Is Promising
While clear reasons to be bullish on Amazon stock include its strong brand, network effects, and high-quality earnings, its AI opportunity is what I like most right now. The company’s cloud business, AWS, is growing impressively. If you look at its quarterly breakdown, AWS has grown every quarter since Q3 2023. It’s also noteworthy that sales and AWS operating margins have grown consistently on a TTM basis and were logged at 33.4% in the most recent TTM period.
Moreover, the company is optimistic about its AI business, too. Management said that Amazon’s products are a top choice of customers because the AWS team is constantly working on offering more options that support individual AI use cases. The AWS team launched more than twice the number of AI and ML features than other cloud providers. The team is far from done, said management, and will continue to add more AI features that provide value to customers.
Therefore, Amazon’s AI opportunity is certainly promising. AWS is battling with Microsoft’s (MSFT) Azure and Alphabet’s (GOOG) GCP in the cloud market. For reference, cloud and AI go hand in hand since developers use resources on the cloud to build and deploy models like ChatGPT. According to data from Canalys, AWS continues to dominate the cloud infrastructure market with a market share of 33% as of Q2 2024. This trumps the shares of Azure (20%) and GCP (10%) as of the same period.
Additionally, Amazon’s moves in the cloud aren’t slowing down. Those who follow the AI investment theme know that nuclear has emerged as a strong resource for 24/7 clean and cost-efficient power required by power-hungry data centers. On October 16, Amazon signed three new deals to develop nuclear energy projects to “generate energy for decades to come.” Therefore, the increase in CapEx isn’t concerning, for me at least, because I believe in the company’s capital allocation prowess.
Is Now a Good Time to Invest in AMZN Stock?
Amazon is currently trading at 32x times its forward earnings estimate. In my opinion, that’s a rich valuation. Analysts on Wall Street are projecting earnings growth of 63% this year and 22% next year. Accounting for both these growth rates, investors currently pay between 0.5 times and 1.5 times per unit of growth. In hindsight, it may not look that expensive as the company capitalizes on its AI opportunity, but I would wait for a pullback here.
Analysts’ Take on AMZN Stock
On the Street, AMZN stock sports a consensus Strong Buy rating based on 46 Buy and 2 Hold recommendations. The average price target of $224.14 represents an upside of 19.33% from current levels.
The Bottom Line
Amazon is a high-quality compounder that is well-positioned to leverage its size and scale to ride the AI wave higher. It has the resources, technical expertise, and strong brand image to remain a key partner of many AI businesses, both legacy and emerging. Amazon can deliver higher returns in the long run as its AWS business thrives. This is a stock to own and not trade. However, while Amazon isn’t too expensive right now, it’s also not as cheap as I would like. Therefore, I would wait for a pullback.
