E-commerce and cloud behemoth Amazon’s (AMZN) stock has lagged behind some of its tech peers recently following mixed Q2 results and a subdued outlook. However, with a multi-year viewpoint, I remain bullish on AMZN due to its solid cash flows, renewed AWS growth, well-diversified business model, generative artificial intelligence (AI) opportunities, and attractive valuation. Therefore, I believe that investors should capitalize on any share price weakness in the months ahead to buy AMZN stock.
Amazon Delivered Healthy Cash Flows in Q2
In late June, Amazon stock crossed the $2 trillion benchmark in market capitalization for the first time. However, mixed earnings and a weak outlook led to the recent share price weakness.
On August 1, Amazon reported mixed Q2 results. The company’s adjusted earnings per share (EPS) of $1.26 handily beat analysts’ estimates of $1.03 per share and jumped 93.85% year-over-year. Net sales soared 10% year-over-year to about $148 billion, but lagged expectations of $148.7 billion. Further, Amazon provided a somewhat weak Q3 outlook, with net sales projected to grow in the range of 8% to 11% to $154 billion to $158.5 billion.
Despite the mixed Q2 performance, I am bullish on Amazon due to its impressive cash flows. The company’s trailing 12-month free cash flow witnessed a massive 572% year-over-year jump to $53 billion in Q2. The solid cash flows support the company’s significant investments in growth areas like AI. Amazon reported a 54% spike in its capital expenditure to $17.6 billion in Q2, mainly attributable to AI investments.
AWS Continues to be a Key Growth Driver
Another reason supporting my bullish stance is the robust growth potential of Amazon’s cloud business, Amazon Web Services (AWS). Amazon continues to be a market leader in cloud computing with over 30% market share despite intense competition from Microsoft’s (MSFT) Azure.
In Q2, AWS’ sales grew 19% year-over-year to $26.3 billion, as the cloud business is gaining from AI-induced demand. Particularly impressive was the segment’s operating income, which surged 72.2% year-over-year to $9.3 billion. Additionally, AWS saw significant margin expansion in Q2. Notably, AWS’ Q2 operating margin increased to 35.5% from 24.2% in the prior-year quarter.
Amazon Enjoys Growth Across Diversified Businesses
My optimism about Amazon is also backed by its diversified business model, which has helped the company gain an enviable customer base of millions of users across the world. The company has developed various verticals over the years, including its digital advertising platform, which has generated over $50 billion in revenue over the past 12 months.
Moroever, Amazon continues to dominate in the e-commerce space. Despite increasing competition, it holds an impressive 33% market share in the U.S. Also, AMZN’s Prime membership program boasts a loyal and sticky customer base that is difficult for competitors to replicate.
Given the strength across diversified businesses like e-commerce, AWS, and advertising, popular American Investor Cathie Wood’s ARK Investment recently bought around 300,000 shares of Amazon stock in multiple trades after the Q2 earnings.
Amazon Is Seeking Opportunities in Generative AI
Another positive about Amazon is that it is now seeking opportunities in generative AI. Though late in the Gen AI game, Amazon is fast catching up and launching new AI innovations like SageMaker, Bedrock, Trainium, and Q. In fact, in the Q2 press release, Amazon President and CEO Andy Jassy called Q “the most capable GenAI assistant for not just coding, but also software development and business integration.”
With its significant investments and strong execution, Amazon could gain a meaningful market share in the multi-trillion AI industry in the coming years.
Overall, it will be a matter of time before Amazon creates yet another revenue opportunity from its AI investments and other revenue avenues that may arise in the future years. The best part is unlike its AI counterparts like Nvidia (NVDA), Amazon is not solely reliant on the AI industry for its growth.
AMZN Stock Is Trading at a Relatively Cheap Valuation
AMZN stock’s valuation is another plus. As Amazon houses multiple businesses, I believe the EV/EBITDA ratio is the best metric to evaluate the stock’s valuation. Being an industry leader, the company has historically traded at high multiples. At present, however, Amazon stock is trading at around 13.7x EV/EBITDA (on a forward basis) compared to its own five-year historical average of 20.2x. This implies a huge discount of over 30%.
For the sake of comparison, let’s also look at its price-to-sales (P/S) ratio. Amazon is trading at a forward P/S ratio of 2.8x. In contrast, cloud computing and tech giant Microsoft trades at a P/S of 10.9x, while social networking company Meta Platforms (META) trades at a P/S of about 8.1x.
Therefore, I believe AMZN stock is trading at an attractive valuation and presents a great buying opportunity, given the strong growth potential across various business verticals.
Is AMZN Stock a Buy, According to Analysts?
Despite the recent pullback, Wall Street analysts continue to be bullish on Amazon stock. Overall, the stock commands a Strong Buy consensus rating based on 42 Buys and one Hold. AMZN stock’s average price target of $222.75 implies 29.4% upside potential from current levels.
Key Takeaway
I reaffirm my belief that Amazon is preparing for its next phase of growth, driven by reaccelerated AWS growth boosted by AI, a diversified business model with leading positions in e-commerce and cloud businesses, and robust cash flow growth.
Fears of an economic slowdown and specific weakness in the tech sector might keep AMZN stock range-bound in the near term. Nevertheless, Amazon remains a Buy for the longer term. Therefore, I will closely watch AMZN for any share price weakness to buy the stock.
