3 reasons I just bought Amazon stock

It’s all about change.
The post 3 reasons I just bought Amazon stock appeared first on The Motley Fool Australia. –

This article was originally published on All figures quoted in US dollars unless otherwise stated.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Sometimes investing in stocks is simple. Find the best companies and buy shares whenever Wall Street turns negative on them. It can seem counterintuitive. How can the stocks with the best historical performance still produce great future returns? But winners keep winning.

Take (NASDAQ: AMZN) as an example. The stock has returned 167,900% since its initial public offering and 1,530% just in the past decade — after many thought its best days were behind it. Despite those gains in the rearview mirror, I just bought shares. New leadership, a transformational business unit, and a fair valuation all point to one of the easiest decisions I’ve made as an investor.

Changing of the guard

Yes, Jeff Bezos is brilliant. He is the mastermind behind the Amazon we know today. His legend will live long after he departs this earth — be it by spaceship or other means. But by all accounts, he wasn’t the same laser-focused leader in the past couple of years as the man who built the everything store into one of the most celebrated — and feared — companies on earth. 

Amazon’s new CEO, Andy Jassy, has been described as more even-keeled and soft-spoken than Bezos. Despite the personality differences, it has been said his focus on details is truly unique. He joined Amazon shortly after graduating from Harvard Business School and has led Amazon Web Services (AWS) since the cloud computing unit was formed in 2003. He’s grown it into more than half of the company’s operating profit. AWS has posted $52.7 billion in revenue over the past 12 months.  That would make it the 61st largest company by sales in the U.S. if it were a stand-alone company. That’s reason number two.

Amazon Web Services

Understandably, hearing the name elicits visions of frictionless ordering, delivery vans, and brown boxes on your doorstep. But investors know the profit engine of the company is its powerful cloud computing unit. Amazon developed an expertise in operating its massive computer infrastructure thanks to its retail operations and launched AWS as a way to bring that expertise to other companies. 

It’s completely transformed corporate computing. What used to require massive investment in servers, technical staff and real estate can now be leased from Amazon by the minute. The company has more than 200 services available through its cloud infrastructure like creating and managing databases, analytics, accessing virtual servers, artificial intelligence, and security. A new company can now launch and run their business through AWS at a fraction of what it would have cost during the dotcom boom. Startups like AirBnB, Slack, and Lyft are proof.

That’s not to say it’s only for small fast-growing companies. Some of its biggest customers are old-school multinational corporations like General Electric, Johnson & Johnson, and Disney‘s ESPN. In the most recent quarter, Amazon announced Ferrari among its recent deals. 

The unit continues to grow. It is opening new regions to increase availability of the AWS services across the globe. In fact, it isn’t just growing, it’s accelerating. AWS revenue has grown faster in each of the past two quarters. That performance, and what it could mean for the long term, is one of the reasons I’m adding shares now.

AWS Revenue
YoY Growth

Q2 2021
$14.8 billion

Q1 2021
$13.5 billion

Q4 2020
$12.7 billion

Q3 2020
$11.6 billion

Q2 2020
$10.8 billion

Q1 2020
$10.2 billion

Data source: Amazon; YoY=year-over-year.

The valuation is fair

Like most great companies, Amazon stock has rarely been cheap. Over the years it has only traded below 24 times operating cash flow during times of relative market panic. And those can’t be predicted. 

AMZN data by YCharts

After its second quarter earnings were released, the stock has fallen almost 9%. The company’s quarterly sales and forecast fell short of Wall Street’s projections. Currently, the average estimate from analysts is for $490.3 billion in revenue for the full year. Despite last quarter’s hiccup, the past few years can be used to project the normal rate of operating cash flow.

Cash Flow From Operations (CFFO)
CFFO as Percent of Revenue

FY2021 YTD
$221.6 billion
$16.9 billion

FY 2020
$386.1 billion
$66.1 billion

FY 2019
$280.5 billion
$38.5 billion

FY 2018
$232.9 billion
$30.7 billion

FY 2017
$177.9 billion
$18.4 billion

Data source: Amazon.

Using the pre-pandemic 13.7% in 2019 as a guide, the stock’s $1.67 trillion market cap is roughly 24.8 times normalized operating cash flow for 2021. That would be right in line with historically good times to buy shares. With the ultra-profitable AWS becoming a larger part of the business, the cash flow as a percentage of revenue is likely to keep climbing in the years ahead. It’s just one more reason I was happy to add shares of Amazon to my portfolio.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

The post 3 reasons I just bought Amazon stock appeared first on The Motley Fool Australia.

Should you invest $1,000 in Amazon right now?

Before you consider Amazon, you’ll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now… and Amazon wasn’t one of them.

The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of August 16th 2021

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Amazon stock: Investors expect too much

Jason Hawthorne owns shares of Amazon. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Airbnb, Inc., Amazon, and Walt Disney. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Johnson & Johnson and has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool Australia has recommended Amazon and Walt Disney. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

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