Sunday, 15 September 2024
by BD Banks
Amazon (NASDAQ: AMZN) is the world’s fourth-largest company by market cap, but it’s the classic case of winners keep on winning. Missed the chance to buy it before it minted millionaires? You can still benefit from owning Amazon stock. Here are three reasons to buy it today.
Amazon’s foray into generative AI has created the most hype for Amazon stock over the past two years. However, the reality is more than hype. Customers are using Amazon’s AI tools and finding value in them. As Amazon invests in upgrades and new features, it should be able to keep its dominant position in cloud computing and capture greater market share.
Amazon Web Services (AWS) sales growth accelerated to 18.8% year over year in the second quarter. CEO Andy Jassy attributed that to three factors: Clients have finished their cost-optimization efforts that began with high inflation, they’re looking for ways to modernize their infrastructures, and they’re excited about AI.
He’s said several times that 85% of company infrastructure spend is still off the cloud, but that’s going to flip. The flip is starting to happen, and that could send a torrent of business Amazon’s way. AWS is the leader in global cloud computing, with a 31% market share. It’s preparing itself to stay on top of the competition.
Based on customer feedback, management believes that they’re looking for flexibility and options in their cloud spend. It’s working to develop a broad base of services that meet any kind of generative AI demand, from the most customizable for developers to plug-and-play options for small businesses.
Since it’s Amazon, it also competes in price. So, while it works with Nvidia, it’s also developing cheaper chips for customers looking for affordability. Jassy said, “This team is cooking, but we’re not close to being done adding capabilities for our customers’ interface.”
AI may represent the greatest growth opportunities for Amazon right now, as well as a new direction. But it’s investing in its other businesses and producing results.
Advertising has been Amazon’s fastest-growing segment for a while, and revenue increased 20% year over year in the second quarter, or by $2 billion. It already offers unmatched exposure to advertisers targeting Amazon customers through sponsored ads on its e-commerce platform, and its new ad-supported Prime streaming tier is adding new opportunities for advertisers and Amazon.
E-commerce continues to show progress, with unit growth outpacing sales growth as consumers trade down in price. They’re counting on Amazon to provide a wide range of options and prices with fast and free shipping. Jassy said that same-day or next-day shipping rates are at record levels, breeding more reliance on Amazon for essentials.
It just expanded its Prime program for shoppers at Amazon Fresh, including 10% off certain private-label products, and launched a new no-frills brand called Amazon Saver, with many items selling for under $5.
The market didn’t take kindly to Amazon’s guidance coming in slightly below expectations for third-quarter revenue in the second-quarter report; analysts are expecting $157.14 billion, while Amazon gave a midpoint of $156.25.
Amazon stock dropped after the report, reaching its lowest price-to-earnings (P/E) ratio in a decade. It’s already been climbing since then because many investors recognized it as a bargain. At the current price, it trades at 44 times trailing-12-month earnings. That’s still quite a deal for Amazon stock, which typically trades at a much higher valuation.
There are plenty of other reasons to have confidence in Amazon stock, such as tailwinds — if interest rates are cut next week — and its expanding healthcare business, and now looks like a great time to buy.
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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. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Nvidia. The Motley Fool has a disclosure policy.