Cathie Wood and Warren Buffett have few investing characteristics in common. Buffett helped build it Berkshire Hathaway growing into one of the most successful investment firms in the world by primarily owning blue-chip stocks to generate stable cash flow. In comparison, Wood’s Ark Invest navigates the capital markets through a range of risky and profitable opportunities in emerging market themes such as artificial intelligence (AI) or biotechnology.
Nevertheless, Berkshire and Ark Invest both have a position in the “Magnificent Seven” member Amazon(NASDAQ: AMZN). While it’s not an important position for either investor, I think there are several reasons why both Wood and Buffett are attracted to such a stock.
Below I’ll detail Amazon’s catalysts and why I consider the stock an absolute buy right now.
One of the things that makes Amazon so unique is its versatile platform. While the company relies on its e-commerce marketplace and cloud computing venture for most of its growth, Amazon has also had success with its Prime subscription service, entertainment and streaming, and even advertising.
The table below summarizes Amazon’s revenue growth across reportable segments through the first six months of 2024:
Category
Six months ending June 30, 2023 (in millions)
Six months ending June 30, 2024 (in millions)
Change
Online stores
$104,062
$110,062
6%
Physical stores
$9,919
$10,408
5%
Services from Third Party Vendors
$62,152
$70,797
14%
Advertising Services
$20,192
$24,595
22%
Subscription services
$19,551
$21,588
10%
AWS
$43,494
$51,318
18%
Other
$2,371
$2,522
6%
Consolidated
$261,741
$291,290
11%
Data source: Amazon.
The high-level conclusion is that Amazon is witnessing growth across its platform. But if we look deeper, there are some more important insights.
Despite a troubled macroeconomy in recent years, Amazon is still managing to generate growth with its e-commerce and physical stores, as well as Prime subscriptions. I think this trend underlines consumer resilience, even in an inflationary environment. Moreover, I see the Federal Reserve’s recent interest rate reduction as a tailwind that could further accelerate Amazon’s online shopping empire.
Another good takeaway is that the company’s cloud computing business, Amazon Web Services (AWS), is growing at double-digit rates and accelerating significantly from 2023. More importantly, operating revenue from AWS – Amazon’s biggest profit engine – – returned to positive growth year after year compared to last year.
Image source: The Motley Fool.
Amazon’s steady growth in revenue is only part of the story. Other important metrics to analyze include operating income and free cash flow.
Over the subsequent twelve months ending June 30, Amazon’s operating profit rose 207% year over year to $54.4 billion, while free cash flow rose a whopping 572% to $53 billion.
Amazon is making money and its robust balance sheet is well equipped to help the company continue to invest for even further growth.
Amazon’s valuation can be difficult to estimate. While the company is consistently profitable, the price-to-earnings (P/E) ratio isn’t the best measure for Amazon, as revenues can fluctuate quite dramatically from one quarter to the next.
Amazon’s cash flow profile is more consistent than its reported net income or earnings per share. Currently, Amazon is trading at a price-to-free-cash-flow (P/FCF) multiple of 41.2. This ratio is about half of Amazon’s average 10-year price-to-earnings ratio of 82.1.
Considering that Amazon is a much more productive company today than it was a decade ago, I’m a little perplexed as to why the company is trading at such a discount compared to historical valuation levels. I think the increasing competition in cloud computing, coupled with some unknowns surrounding the macroeconomy, has made some investors wary of what Amazon’s future might look like.
But to me, these fears are short-sighted. Amazon is quietly chugging along with all aspects of its business. Furthermore, I wouldn’t underestimate Amazon’s ability to use artificial intelligence (AI) as a new thread that stitches together its various operational structures.
To me, Amazon is positioned to continue generating both revenue and profit growth. And as long as cash flow valuation ratios remain at low levels, I see the stock as a no-brainer opportunity for long-term investors.
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*Stock Advisor returns October 21, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions at Amazon. The Motley Fool holds and recommends positions in Amazon and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Cathie Wood and Warren Buffett both own this dirt-cheap artificial intelligence (AI) stock. Time to buy? was originally published by The Motley Fool
