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of S&P500 With the continued strength of artificial intelligence, Nvidia (NVDA -0.12%) A relentless rise in stock prices. Nvidia currently accounts for 5% of the index, its market capitalization exceeds his $2 trillion, and its value exceeds his $200 billion. Amazon (AMZN -2.42%) The first time, it will look like this:
AMZN market cap data by YCharts
Nvidia may continue to raise prices further. It’s a great company (although the stock is expensive). But investors shouldn’t overlook Amazon. Here are my four main reasons why Amazon stock is worth buying like there’s no tomorrow.
1. AWS is making a comeback
Amazon Web Services (AWS)’s growth rate slowed to 13% after increasing 29% in 2022 and 37% in 2021, so the past year has been full of hardships. Sales exceeded $90 billion a year, but some speculated that the golden age of cloud computing growth may have come to an end. This is premature and we expect growth to accelerate this year.
Decreasing data usage budgets became a major hurdle in 2023. Businesses feared a recession that never came, and Amazon aggressively helped customers reduce the cost of using their data. Budgets are likely to be eased this year as fears of a recession ease. While these headwinds are weakening, new tailwinds are emerging. Because much of AWS’s revenue is usage-based (like utilities), it requires a lot of data, so the rise of generative artificial intelligence (AI) software should accelerate growth.
Investors and analysts will be watching AWS closely this year. A return to growth could be a driver for stock prices.
2. Amazon’s free cash flow is back
Amazon’s free cash flow (the amount of money left on hand after paying expenses and fixed assets) hit a record high due to economic stimulus at the height of the pandemic, but it plummeted in 2022 due to multiple challenges. There was shouting at the ports, labor shortages, and record inflation, all of which caused rising costs.
AWS was also a victim of its own success. Significant growth meant that large capital expenditures (CapEx) were required. Amazon spent a combined $125 billion in capital expenditures in 2021 and 2022, compared to $57 billion in 2020 and 2021. That’s a lot of cash, even for Amazon.
These challenges were resolved in 2023, and free cash flow soared, as seen below.
AMZN Free Cash Flow Data by YCharts
Amazon will certainly use the cash to invest in growth, but it could also implement a stock buyback program if it chooses to do so.
3. Amazon’s advertising segment is impressive.
One of Amazon’s fastest-growing revenue streams is online revenue such as product listings, pay-per-click, and video. Advertisers are eager to buy these spots because they know their ads are reaching customers who are actively looking to buy. If you’re like me, you rarely scroll past the first page, but sellers know that. Advertising sales have exploded, reaching $46 billion in 2023 from $13 billion in 2019.
This is the first time advertising sales have exceeded Prime membership sales ($47 billion vs. $40 billion). The sector should also benefit from budget relief in 2024. This is another great and growing revenue stream for Amazon.
4. Consumer confidence is on the rise
I would count myself among those who thought rising interest rates and slowing stimulus would weigh on consumer spending. But there is little sign that consumers will back off. In fact, consumer sentiment, widely considered a leading indicator of consumer spending, has been steadily rising, as shown below.
US Consumer Sentiment Index data from YCharts
While this number remains below pre-pandemic levels, it has risen markedly as inflation declines. This is great news because consumer spending is critical to Amazon’s e-commerce business. As for the inflation rate, it has fallen to 3.2%. This shows that the Federal Reserve’s interest rate hikes are keeping inflation in check and the economy is still growing. We’re not completely out of the woods yet, but things are going very well so far.
Amazon’s stock price has risen significantly over the past year, but it still trades at a discount to its five-year average based on sales and operating cash flow. The tailwinds mentioned above make this a good long-term investment.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Bradley Guichard has positions at Amazon and Nvidia. The Motley Fool has positions in and recommends Amazon and Nvidia. The Motley Fool has a disclosure policy.
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