Amazon Gives 4 Great Reasons to Buy Its Stock

Amazon (AMZN 6.19%) rolling. Shares of the e-commerce and cloud services giant are up more than 30% in 2024. This strong performance comes on top of last year’s 80% increase. The company recently continued its streak of beating Wall Street’s earnings expectations with third-quarter results reported Thursday.

Perhaps the best news for investors came during Amazon’s third-quarter earnings conference call. The company gave four great reasons to buy its shares now.

1. Focus on increasing free cash flow

What is the most important financial metric for a company? I think a strong argument can be made for this. free cash flow. Earnings can sometimes be manipulated temporarily, but what you see is what you get with free cash flow.

Amazon reported free cash flow of $47.7 billion in the last 12 months ending September 30. This reflects a 123% year-on-year increase. Free cash flow, adjusted for equipment leases, was $46.1 billion, up 128% from the prior year. This is astonishing growth.

CEO Andy Jassy Here’s what it said on the third quarter earnings call:“(W)e’s primarily focused on free cash flow here.” That’s exactly what investors should like to hear from senior executives. As free cash flow increases, so do share prices in the long run.

2. AI business is growing faster than AWS

Amazon Web Services (AWS) remains the strongest growth driver for Amazon. AWS sales increased 19% year over year to $27.5 billion in the 3rd quarter. The unit generated approximately 60% of Amazon’s total operating revenue.

There’s no bigger tailwind for AWS right now than artificial intelligence (AI), especially productive artificial intelligence. “If your data isn’t in the cloud, it’s much harder to be successful and competitive in generative AI,” Jassy noted on the third quarter call.

How important is the generative AI opportunity for AWS? The unit introduced almost twice as productive AI and machine learning Features like other top cloud service providers combined.

“AWS’s AI business is a multibillion-dollar revenue generation business that continues to grow by triple-digit percentages year over year and, at this stage in its evolution, is growing more than three times faster as AWS itself grows,” Jassy said. “And AWS “We felt like it was growing pretty fast,” he added.

3. Expectation of massive e-commerce growth over the next two decades

While AWS may be Amazon’s superstar, we can’t ignore the company’s core e-commerce business. After all, e-commerce is still Amazon’s biggest source of revenue. And it may present a bigger growth opportunity than you think.

As Jassy explained on the third-quarter call, Amazon currently only has around a 1% market share in the massive global retail market. He said 80 percent to 85 percent of retail sales are still made in brick-and-mortar stores. Jassy then shot: “And if you believe that the equation is going to change in the next 10 to 20 years, which we do, there are a lot of opportunities, not just for us but for a lot of players.”

Amazon is working hard to take advantage of this huge opportunity. The company accelerates delivery times, increases operational efficiency and offers lower-cost products. These efforts are paying off. In the third quarter, Amazon’s store sales increased 9% year over year in North America and 12% internationally.

4. A “significant positive development” in the advertising business

Advertising is another important growth driver for Amazon. The company’s advertising revenue reached $14.3 billion in the third quarter, up nearly 19% year over year. “Even though we have a lot of ad revenue today, there is a significant increase,” Jassy said.

One way Amazon increases its advertising revenue is by increasing the relevance of the ads it shows to online shoppers. The company also kicked off its first season of Prime Video advertising.

Will you buy Amazon shares with the punch?

Amazon isn’t just about delivering strong free cash flow growth; delivers. There’s no denying the impressive growth of AWS, especially its AI business. Jassy is right about the huge retail opportunity, although e-commerce may not grow as much as he thinks over the next two decades. He’s also almost certainly right that Amazon could significantly increase its ad revenue.

Few companies have the track record that Amazon has. Few offer this much growth opportunity. So should you buy Amazon shares with the punch? I think so too.