Why Amazon Stock May Be a Good Buy Today

On the surface, Amazon (AMZN -3.65%) stock may seem expensive. Shares trade at 41 times earnings. But a look under the hood shows a number of reasons why the stock easily lives up to its premium valuation.

Here are some of the top reasons why investors might want to consider adding shares of the e-commerce and cloud computing giant to their portfolios today, if they don’t already own them.

Flaunting cash

Sure, Amazon’s $1.8 trillion market capitalization might seem overwhelming to some stock-seeking investors. But the company’s underlying cash flow helps justify that valuation. For example, the company’s operating cash flow over the past 12 months came in at a staggering $108 billion. This huge cash flow allows for huge reinvestments in its businesses while producing substantial free cash flow. Total free cash flow trailing 12 months, less finance lease principal repayments and financing obligations, was $53 billion.

Amazon’s price-adjusted free cash flow multiple of 34 is much easier to accept than the price-earnings multiple of 41.

A profitable cloud computing business

Still, even a price-adjusted free cash flow multiple of 34 may seem a little expensive for a company that grew total revenue just 10% year-over-year in its most recent quarter. But an overview of Amazon stock is incomplete without understanding how important its cloud computing business, Amazon Web Services (AWS), is to the company. Coming in at 16% of trailing 12-month sales, some investors may make the mistake of concluding that the segment is of little importance to Amazon’s overall business. But this couldn’t be further from the truth.

First, investors should note that AWS is growing faster than Amazon’s overall business. This means it will grow as a percentage of revenue over time. Consider that AWS revenue grew nearly 19% year-over-year in the second quarter.

Second, AWS is far more profitable than the rest of Amazon’s business. AWS’s operating income in Q2, for example, was $9.3 billion. This gives the segment an operating margin of over 35%. Moreover, this segment represented approximately 63% of the total operating income. This means that as AWS grows, it will have a huge impact on Amazon’s profitability.

Amazon CEO Andy Jassy emphasized the importance of AWS in the company’s latest earnings call, noting that none of the advances it’s making in cloud computing are particularly noteworthy. “AWS continues to be the top choice for customers,” Jassy said in the company’s second-quarter earnings release.

Of course, it’s no surprise that AWS remains a top choice for customers. The company’s market leader in cloud computing gives it scale and cost advantages, helping it reinvest aggressively and innovate quickly.

Amazon’s scale in cloud computing is hard to overestimate. Synergy Research Group estimates that AWS holds nearly a third of the global cloud infrastructure market share, with MicrosoftAzure is second — about six percentage points behind.

Once investors realize the importance of AWS as a growth engine for Amazon, the fundamentals begin to justify the stock’s current valuation.

A wide ditch

The last key factor that greatly helps the bull situation for Amazon stock is the company’s competitive advantage: scale. As both the world’s largest e-commerce retailer and cloud-computing infrastructure provider, the company’s overall size is a competitive advantage in itself.

In other words, the company is able to spread its fixed costs over a larger number of customers than its peers, turning its flywheel faster, so it can invest more aggressively than its competitors and expand its economic moat further. a lot.

Given Amazon’s significant cash flow, its profitable and fast-growing cloud computing business, and its competitive advantage in scale, the stock looks like a good buy today. Of course, there’s always the chance that the company’s edge in retail and cloud computing will erode over time, and that Amazon’s future may not be as bright as expected. But that risk seems small given the company’s long history of rapid growth, expanding profitability and maintaining market share leadership.