Source: PaxForex Premium Analytics Portal, Fundamental Insight
Amazon has had an impressive performance this year, with its stock rising over 20%. However, many believe this is just the beginning of a much larger upward trend.
Amazon's business model is undergoing a transformation that investors have never witnessed before, and this is fantastic news. Here are three key insights about Amazon that investors should be aware of. While there are numerous reasons to be interested in Amazon stock, these points make a compelling case to buy now.
- Resurgence in Amazon Web Services' Growth
Amazon Web Services (AWS), Amazon's cloud computing division, is experiencing a resurgence. AWS allows clients to rent computing space and run workloads over the cloud, a popular strategy that enables customers to scale computing power as needed. This is particularly in demand as many companies are developing AI models to enhance their operations.
Despite a sluggish demand for AWS in 2023 compared to competitors like Google Cloud and Microsoft Azure, the situation is improving. Amazon's significant investment in Anthropic, a generative AI startup, has equipped AWS with advanced AI tools available on its platform. CEO Andy Jassy highlighted this in Amazon's Q1 conference call, stating, "We see considerable momentum on the AI front where we've accumulated a multibillion-dollar revenue run rate already."
This positive development is reflected in the financial results. In Q1, AWS saw a 17% year-over-year increase in net sales and an 84% rise in operating income. Another growth catalyst is the end of the optimization trend. Last year, companies focused on cost-cutting, including optimizing cloud computing spending. With this trend now complete, AWS is benefiting from new workloads, rather than declining revenue from reduced workloads.
AWS remains Amazon's most profitable segment, which is crucial for its success. However, other areas of the business are also starting to contribute significantly.
- Amazon's Accelerating Cash Generation
AWS has long been a profitable segment, Amazon's commerce divisions haven't always shared that success. The company had to recover from the significant investments in its supply network in 2021 and 2022, which affected its North American division. Additionally, Amazon's international operations have historically been unprofitable, but this is starting to change. In Q1, the international segment posted its first profitable quarter since 2021.
This turnaround has significantly bolstered Amazon's cash generation, which is now gaining momentum.
In the past 12 months, Amazon has generated $50.1 billion in free cash flow (FCF), a stark contrast to the $3.3 billion FCF outflow in Q1 of the previous year. The trends associated with this FCF are equally encouraging.
Historically, the first quarter is weak for Amazon due to high spending in Q4. This pattern results in a relative peak at the start of each new year, followed by a significant decline. This occurred again in 2024, but notably, this was the first year in recent memory that the drawdown did not result in a negative FCF. Additionally, the Q4 peak was the highest it has ever been.
This indicates that Amazon's cash flows are improving and sustainable, which is a positive sign for investors. As Amazon's cash flows increase, the company could initiate a dividend or start repurchasing stock, benefiting long-term investors.
But there's another reason why Amazon is a compelling buy right now.
- Amazon is Still Below Its Average Valuation
Despite Amazon's significant cash flow growth and improvements across its business, the stock is still undervalued based on its price-to-sales (P/S) ratio. Traditional valuation metrics centered around earnings aren't as useful for Amazon yet, but the P/S ratio indicates that Amazon is valued at levels seen during the post-COVID demand drawdown and before that in 2018.
This suggests stock isn't overvalued and could be a reasonable purchase today.
Considering Amazon's growth prospects and increasing FCF, we can say Amazon is an excellent buy right now. There are still many aspects of Amazon's business poised for transformation, and investors will benefit from buying and holding it for the long term.
As long as the price is above 175.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 180.24
- Take Profit 1: 190.00
- Take Profit 2: 200.00
Alternative scenario:
If the level of 175.00 is broken-down , follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 175.00
- Take Profit 1: 170.00
- Take Profit 2: 165.00
