Amazon: A Strong Investment Opportunity for Both Cathie Wood and Warren Buffett
Cathie Wood and Warren Buffett have different investment styles. Buffett built Berkshire Hathaway into one of the best investment firms by focusing on blue-chip stocks for steady cash flow. On the other hand, Wood’s Ark Invest explores high-risk, high-reward fields like artificial intelligence and biotechnology. Despite these differences, both investors hold shares in Amazon (NASDAQ: AMZN), indicating their shared faith in the stock, albeit in small amounts.
In this article, I will outline the reasons why Amazon shows promise and discuss why the stock appears to be undervalued.
Amazon’s Business is Thriving
Amazon stands out due to its diverse platform. Although its e-commerce marketplace and cloud computing drive most of its growth, Amazon also benefits from its Prime subscription service, entertainment, and advertising segments.
The following table displays Amazon’s revenue growth across its segments for the first half of 2024:
| Category | Six Months Ended June 30, 2023 (in millions) | Six Months Ended June 30, 2024 (in millions) | Change |
|---|---|---|---|
| Online stores | $104,062 | $110,062 | 6% |
| Physical stores | $9,919 | $10,408 | 5% |
| Third-party seller services | $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 main takeaway is that Amazon is experiencing growth across its entire platform. Despite economic challenges in recent years, the company is showing resilience in e-commerce, physical stores, and Prime subscriptions. This suggests that consumers continue to spend even amidst inflation. Additionally, the Federal Reserve’s recent interest rate reductions may further boost Amazon’s online sales.
A further highlight is Amazon Web Services (AWS), which is recording impressive double-digit growth compared to last year. Operating income from AWS, Amazon’s top profit center, is also showing positive year-over-year growth.
Image source: The Motley Fool.
The Importance of Cash Flow
While revenue growth is important, other financial metrics like operating income and free cash flow are crucial too. Over the trailing 12 months ended June 30, Amazon’s operating income surged by 207% year over year to $54.4 billion, while free cash flow skyrocketed by 572% to $53 billion.
With this substantial cash flow, Amazon is in a strong position to continue investing for future growth.
Why Amazon Stock is Considered Undervalued
Evaluating Amazon’s valuation can be complex. While the company is consistently profitable, the price-to-earnings (P/E) ratio is not always a reliable indicator because earnings can vary significantly across quarters.
A better metric to consider is the price-to-free-cash-flow (P/FCF) ratio. Currently, Amazon has a P/FCF of 41.2, which is roughly half of its 10-year average of 82.1. Given that Amazon is a much more established business today than it was a decade ago, it is puzzling why the stock trades at such a discount to historical levels. Increased competition in the cloud sector and economic uncertainties have left some investors feeling cautious about Amazon’s future.
However, these concerns seem overly cautious to me. Amazon continues to perform well across all facets of its business. Moreover, the company’s potential to leverage artificial intelligence (AI) could provide significant benefits moving forward.
In my view, Amazon’s potential for continued revenue and profit growth is strong. Given its current low cash-flow valuation, I see it as a prime investment opportunity for those looking to invest for the long term.
A Chance at a Profitable Investment
Do you feel like you missed out on investing in successful stocks? You may want to pay attention now.
Occasionally, our expert analysts issue a “Double Down” stock recommendation for companies they believe are poised for significant growth. If you fear you’ve missed your chance, now might be the perfect time to buy.
- Amazon: a $1,000 investment when we first recommended it in 2010 would be worth $20,803 today!*
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- Netflix: a $1,000 investment from when we doubled down in 2004 would be worth $404,086!*
We’re currently issuing “Double Down” alerts on three remarkable companies, and you may not encounter another opportunity like this soon.
See 3 “Double Down” stocks »
*Stock Advisor returns as of 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 in Amazon. The Motley Fool has positions in and recommends Amazon and Berkshire Hathaway. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
