Should You Hold Amazon (AMZN)?

It’s been 30 years since Jeff Bezos founded Amazon (AMZN).

What started as an online marketplace for books has become a nearly $2 trillion behemoth with its hands in everything from AI to supermarkets.

Financial pros have consistently placed it in the top five searches stretching back years, according to our TrackStar data.

If you had invested $10,000 in Amazon a decade ago, you’d have over $120,000 today.

That’s pretty incredible, considering the company didn’t really start turning a consistent profit until 2016.

Yet, despite beating analyst estimates, the company forecast dour sales in Q2, similar to Starbucks and Mcdonald’s.

With shares trading near all-time highs, is it better to wait for a pullback?

Amazon’s Business

Founded by Jeff Bezos in 1994, Amazon quickly diversified from books to include electronics, apparel, furniture, food, toys, and virtually anything imaginable. 

Today, the company serves customers worldwide through its e-commerce platform, offering fast and reliable delivery options like same-day and next-day shipping to Prime members in select areas.

Amazon segments its business into North America (60% of sales), International (22% of sales), and Amazon Web Services (AWS) (18% of sales).

It also splits its business into product and service sales (43% and 57% respectively).

Amazon invests heavily in technology and infrastructure to enhance its customer experience and streamline operations. 

The company’s Q1 2024 results showcased the company’s strength, with net sales rising 13% to $143.3 billion and operating income soaring 221% to $15.3 billion. 

All segments thrived, as North America grew 12%, International climbed 10%, and AWS expanded 17%, reflecting Amazon’s successful investments in innovation, infrastructure, and customer experience.

Financials

Source: Stock Analysis

Unlike many companies, Covid-19 lockdowns helped Amazon, sending sales soaring.

The company immediately began to add warehousing and distribution centers until 2022-2023, when demand suddenly abated.

Since then, the company has focused on trimming its workforce and improving margins, which is reflected in the operating and free cash flow improvements in the last year.

The company generates nearly $100 billion in annual operating cash flow and is closing in on $50 billion in annual free cash flow.

Keep that in mind when you look at the $161 billion in debt the company holds, about half of which was added during the pandemic at rock-bottom interest rates.

However, Amazon holds $85 billion in cash, giving it plenty of flexibility to invest.

One thing it doesn’t do is return cash to shareholders.

The company doesn’t pay a dividend nor buy back stock.

Valuation

Source: Seeking Alpha

Amazon’s P/E multiple is in the middle of the large-cap tech group. However, its price-to-cash multiple is cheaper than its peers.

It also boasts an incredibly low price-to-sales ratio and a price-to-earnings growth (PEG) ratio of 0.07x. However, the non-GAAP PEG ratio of 1.77x is probably more realistic of what we can expect from them in the future.

Growth

Source: Seeking Alpha

Unlike Tesla (TSLA) or Nvidia (NVDA), Amazon’s growth has been steady, though slowing in the past couple of years.

While many worry the retail business may be saturated and facing a consumer recession, the AWS side continues to expand rapidly.

This is a boon to profitability as the AWS side runs better margins.

Profitability

Source: Seeking Alpha

Amazon’s focus on bringing down costs has boosted its bottom line.

EBIT margin at 8% is the highest in years, while free cash flow margin at ~10% is the highest it has ever been.

However, the company’s capital-intensive investments have kept its returns on equity, assets, and total capital somewhat muted relative to its peers.

Our Opinion 9/10

Amazon is one of the best-run businesses in the world and has a huge competitive advantage.

While we expect consumer spending to retrench in the second half of 2024, AWS should offset those declines.

The heavy cash generated from operations gives the company enormous flexibility to acquire and invest where needed when we expect many competitors to pull back on spending.

This sets Amazon up for a growth explosion when the recession ends.