Predicting whether Amazon should be bought, sold, or held as an investment in 2025 is a topic of interest.
Predicting whether Amazon should be bought, sold, or held as an investment in 2025 is a topic of interest.
It took some time, but tech titan Amazon (AMZN 1.30%) finally surpassed its all-time high, last reached in 2021. Despite the broader market continuing to climb higher, reminding us of 2021, which was largely fueled by a market bubble caused by 0% interest rates, Amazon stands out.
Three years ago, Amazon was a different company. While everyone is aware of its dominance in the e-commerce sector, accounting for about 40% of online shopping in the US, its Q3 earnings highlighted some promising developments about Amazon's future.
I'll outline what excites me about Amazon for the next few years and whether the stock, which has gained 37% over the past year, is a buy, sell, or hold.
Amazon's fastest growth is in lucrative areas
Most people know that Amazon started as an online bookstore in the late 90s and expanded into a powerhouse offering a vast product selection, low prices, and quick delivery, securing about 40% of US e-commerce sales. However, what sets Amazon apart is its ability to leverage its e-commerce business to create additional revenue streams.
Amazon sells products online with thin margins to keep competitors at bay. It's encouraging to see that its fastest growth is now in areas that can significantly contribute to its profits.
Specifically, I'm examining:
- The cloud computing segment, Amazon Web Services (AWS), grew by 19% annually in Q3.
- Subscription services, including Prime memberships, increased by 11% annually.
- Advertising and streamed video, as well as ads shown to online shoppers, grew by 19% annually.
Amazon doesn't separate its operating income for each specific segment. Instead, it divides it into three categories: North America, International, and AWS. However, AWS alone generated $10.4 billion of Amazon's $17.4 billion total operating profit (60%) in Q3, despite representing only 17% of sales.
Essentially, you want Amazon's fastest-growing segments to be in these higher-margin areas because they will have a more significant impact on the bottom line.
Cash reserves are escalating
That's exactly what's happening. As shown in the chart below:
- Amazon's cash flow from operations (daily business activities) has escalated sharply in recent years, boosting its free cash flow, despite the company investing more of its sales back into the business.
- Amazon has invested in improved logistics to support its e-commerce business and AWS to expand its computing capacity to accommodate growth and new AI opportunities.
If these high-margin segments weren't growing, increasing Amazon's capital expenditures from 4% to 6% of sales to 11% to 13% would significantly slow earnings growth. However, Amazon's earnings have skyrocketed over the past couple of years, and analysts predict they will increase by an average of 28% annually over the next 3 to 5 years.
Amazon stock: buy, sell, or hold?
Amazon invests so much in the business that basing the stock value solely on current earnings can be misleading. Instead, I prefer to compare the stock to Amazon's cash flow from operations as it provides a more consistent measure of the company's performance.
The chart suggests that the stock market has yet to fully grasp the amount of cash Amazon generates compared to three years ago. Its surging cash flow has reduced Amazon's valuation to approximately 30% below its 10-year average and to its lowest levels since around 2016.
Looking ahead, it appears likely that Amazon's ad business and AWS will continue to grow for the foreseeable future. AWS is well-positioned to capitalize on AI, which still seems to be in its early stages, while Amazon continues investing in drawing viewers to Prime Video. Starting in 2025, Amazon will begin broadcasting more live sports, including the NBA and NASCAR.
Consider Amazon stock as an attractive long-term investment opportunity.
Here are two sentences that contain the words 'finance', 'money', and 'investing' and follow from the text:
The increasing cash reserves and profitable growth in areas like cloud computing, subscription services, and advertising make Amazon an attractive investment target for those interested in finance and money. If you're considering investing in Amazon, it's worth noting that the company's stock has gained significantly over the past year, offering a potential opportunity for capital growth.