5 brilliant reasons why Amazon will crush the market

Amazon (AMZN -1.51%) it has been one of the best performing stocks in the market, no matter what time frame you look at. It’s up 47% over the past year, 115% over the past five years and 1,060% over the past decade — handily outperforming the market (as measured by S&P 500) over that time interval. But none of that matters now because you can’t travel back in time to invest in Amazon earlier.

All that remains is the future, and determining whether a stock can beat the market going forward is a difficult proposition. However, we have come up with five reasons why Amazon can do this, making it an interesting investment opportunity.

1. Improving trade margins

When you think of Amazon, the first thing that comes to mind is its online store, which has almost anything you can think of. However, Amazon is a much broader business. Whether it’s cloud computing, advertising or fulfillment, Amazon is an incredibly complex company involved in many areas.

Despite the growth of other areas, his commercial business is still the biggest part of his business. This is a fairly mature segment, so improving margins is a must. Amazon did just that, with its North American business posting an operating margin of 5.6% in the second quarter, up from 3.9% in last year’s second quarter. While that might not sound like a massive improvement, it did drive operating income up 58% year-over-year.

Internationally, Amazon posted an operating profit of $273 million, compared to a loss of $895 million last year. The international business has not consistently turned a profit, but it will greatly boost Amazon’s profit picture once it does.

According to CEO Andy Jassy, ​​there is still work to be done. But if Amazon can continue to improve its margin in its commerce business, it will help propel Amazon to new heights.

2. Advertising is a bright spot

Within Amazon’s commerce division is advertising services, which is one of Amazon’s fastest-growing segments. While investors don’t know what its profit contribution is (hint: it’s probably a lot), it’s seen tremendous growth, posting year-over-year growth of at least 20% since Q1 2023.

Advertising is a well-known high-margin business (just look at Meta platform), so any huge growth in this segment should help boost Amazon’s global trading margins. If advertising can generate strong growth in the future, it will be a key factor in helping Amazon overtake the market.

3. AI Powering AWS Growth

Another part of Amazon is its cloud computing business, Amazon Web Services (AWS). AWS has been an absolute cash cow for Amazon and has recently returned to growth mode thanks to new artificial intelligence (AI) workloads coming online.

AWS puts Amazon’s commercial business to shame, posting 19% revenue growth in Q2 with an operating margin of 36%. It’s critical that AWS continues to post strong quarters, as its growth helps boost Amazon’s bottom line in a huge way. AI will significantly help AWS’s growth case, which is critical to maintaining its status as a strong stock.

4. AWS boosts Amazon’s margins

As mentioned above, AWS accounts for a large portion of Amazon’s profits. In Q2, AWS accounted for 64% of Amazon’s total operating income. This means that if AWS grows profits at a faster rate than the rest of the company, Amazon’s profits will also grow at a faster rate.

Some investors ignore this key factor, believing that Amazon is just a mature commercial business that can’t get any bigger. Cloud computing is far from it, and AWS is poised to benefit.

Mordor Intelligence predicts that the cloud computing market opportunity will grow from $680 billion today to $1.44 billion by 2029 — a compound annual growth rate of 16.4 percent. This massive growth is what AWS is poised to cash in on and will help Amazon become a market-crushing stock.

5. Generating massive free cash flow

Thanks to management’s focus on efficiency, Amazon is now producing record levels of free cash flow (FCF).

AMZN Free Cash Flow Data by YCharts.

Generating massive amounts of cash is the hallmark of a great business, as it can be used to reward shareholders through share buybacks, dividends or debt repayment. It also adds to Amazon’s cash hoard, allowing the company to pursue investment opportunities it believes could become the next big thing.

Amazon has already proven its ability to build significant ancillary businesses by integrating its delivery network, advertising services and AWS. I don’t know what Amazon’s next big hit is, but it’s probably already in development.

Amazon has a strong business and is expected to continue its dominance for years to come. These factors combine to make a stock that is slated to outperform the market, and therefore I am a buyer.