- Amazon's dominance in the cloud infrastructure market is powering its profitability and earnings growth.
- Improving Free cash flow means the company has a greater amount of funds to invest. Investing for growth is something the company has excelled at.
- The following 3 fundamental trends make Amazon.com, Inc. stock a solid buy.
Amazon.com, Inc. (NSDQ:AMZN) wants to be your one-stop retailer. The company's latest move to build brick and mortar stores and provide curbside pickup locations is another move in that direction. Amazon has taken a very well thought out path and conquered the word of retail. However, the company was mostly into non-perishables, or goods with a longer shelf life, until a while back. In a bid to delight users and make the experience of online shopping more 'physical store' like, the company worked hard to remove the gap between order and fulfillment (receipt of order). That's what the 2-hour delivery was aimed at. Amazon has come a long way in closing the gap on 'Instant gratification', a key differentiator of shopping in a physical store.
Also, what has been impressive about the Seattle, Washington, based cloud to e-commerce giant has been its ability to apply its learnings in one business to sell a new product or service. At this point, it would be worth remembering that the idea of AWS was born out of Amazon's own need to support a high volume of data (for its e-commerce ops). Similarly, the company is now leveraging its expertise in quick delivery (2 hour and same day delivery) to sell grocery today. We won't be surprised if Amazon also has a logistics arm soon, which could be catering to third party deliveries (remember the planes Amazon leased earlier this year?). In short, Amazon has become an expert proponent of the theory of 'reinvesting into the business' and growing its internal operations to a scale where they can be sold as an additional product/service.
This reinvestment focused strategy has had a significant impact on the Amazon stock price, which has more than quadrupled in the last 5 years.
However, an obvious point of contention among the bulls and bears was the fundamental approach to Amazon stock valuation. With a long history of marginally profitable operations, buying into Amazon stock was always perceived to be a risky bet. But, this could change. Why? Well, here are 3 fundamental trends which make Amazon stock a solid buy today.
Amazon's cloud offering AWS (Amazon Web Services) has taken the industry by storm. Its exponential growth over the last few years has resulted in a huge lead over competitors, catapulting the service to 'Market leader' status in a rapidly growing market.
Growing profit margins
The rapid growth of AWS has had a couple of spill-over effects on Amazon's overall financial performance. With an annualized revenue run rate of $11.6B, AWS is definitely adding a bit of mass to Amazon's top line. However, more importantly, the segment has had a more dramatic impact on the company's operating margin. Given the fact that the segment is operating at margins far above expectations, the AWS division has helped Amazon report a string of profitable quarters. To put things in perspective, the AWS segment accounted for a little less than 10% of Amazon.com's Q2 revenue while accounting for nearly 56% of the operating margins. Given the fact that the segment's operating margins will head closer to the mid 20's, and the explosive growth the segment is experiencing, Amazon's profit margins will continue their northward journey.
The impact of the expanding profit margins and Amazon's strong top line growth (25% YoY growth on TTM basis) has been significantly felt on the overall earnings per share, which have climbed to $4.02 per share on a TTM (Trailing Twelve Month) basis, up from $1.24 per share in FY 2015.
Rising Free cash flow
The third, and perhaps the most important trend which could lift Amazon stock higher has been the rapid growth in Free cash flow. The company delivered a TTM free cash flow of $7.332B in the latest quarter (Q2 2016), which was up by a huge 67% YoY. The free cash flow growth provides the company with much-needed firepower to continue investing in its growing operations. Investing for growth is something Amazon has excelled at in the past. And, there is no reason to doubt that the company cannot continue to excel with its strategy of re-investment.
A number of analysts have recently hiked their price targets for Amazon stock. And, it's not without reason. Key fundamental metrics are showing significant growth. AWS growth, improving profit margins and strong growth in free cash flows are 3 good reasons the Amazon stock presents an attractive investment opportunity, inspite of the seemingly expensive valuations.
Also see: The latest top technology stock picks from Amigobulls.