E-commerce and cloud market leader Amazon (NASDAQ:AMZN) is a real stock winner whose value is constantly increasing. Shares are trading near their all-time highs, and a mere $1,000 investment in the May 1997 initial public offering has turned into over $1.9 million.
New investors will naturally wonder if they missed this stock’s train. Does Amazon still have the juice to squeeze out of the appreciation in its stock as the company nears a $2 trillion valuation? The answer to The The question asks two other different questions:
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Can Amazon still grow?
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Does the stock’s valuation leave room for more?
After doing some homework, I was surprised at the answers I found. Here’s what you need to know.
Can Amazon still grow?
Of course, growth becomes more difficult when you’re a huge company, generating $574 billion in annual revenue, as is the case with Amazon. But to borrow a phrase from my children: Amazon is built differently.
That’s because Amazon operates in three huge markets that offer more room for growth and opportunity than most: e-commerce, cloud computing and digital advertising. It is America’s leading e-commerce company with a 38% market share. In cloud computing, Amazon Web Services (AWS) is the market leader with a share of 31%. Amazon is expected to account for 15.2% of all digital ad spending in the US in 2025.
This leadership position helps Amazon compete because the company has the size and scale that most competitors cannot match. It can deliver a better product for less money.
The best part is that these big trends favor Amazon. Today, e-commerce still accounts for just over 15% of total retail in the United States. That’s trillions of dollars in consumer spending that hasn’t yet moved online.
Cloud computing has become the foundation of the Internet, and now artificial intelligence (AI) has added several new spaces that can be built and stacked on top. Amazon recently announced $50 billion in new data center investments for Virginia and Japan, underscoring just how much computing power AI and an increasingly digital world will require. Some believe in a bullish scenario in which public clouds like AWS could become a $10 trillion market in the coming years.
Third, Amazon has built a huge presence in the media landscape through the use of its Prime subscription program, which includes around 200 million paying accounts. Prime members get access to streaming content via the National Football League and Amazon’s rights to Thursday Night Football. Additionally, Amazon generates billions of dollars in advertising revenue through Prime and its affiliate sales program. The ad business grew 27% year over year in the fourth quarter, faster than any other part of Amazon. Looking at fourth-quarter advertising revenue on an annual basis, the segment was worth nearly $60 billion. Amazon’s strong growth rate appears to provide plenty of room for future expansion of its advertising business.
Overall, Amazon seems to have plenty of opportunities to continue growing.
Does the valuation make sense?
Amazon founder Jeff Bezos once said the company was “notoriously unprofitable.” He said that you need to look at the company’s cash flow because it reinvests all of its profits back into the company. In other words, valuing the stock based on net income doesn’t tell the whole story.
So I looked at Amazon’s price to cash from operations (CFO) ratio to see if it’s still attractive today. After all, shares are trading at all-time highs, up 88% in the past year.
It is striking how low the valuation of the stock was, as the share price almost doubled in just one year. At less than 20 times operating cash flow, this bargain doesn’t come along often. The good news is that shares are still well below their average valuation over the last decade.
So yes, stocks still offer some value today.
Is it too late to buy from Amazon?
Whether you buy shares depends on what the company might do in the future and what price you’ll pay for that potential growth. You will likely make money over time if you do these two things right.
Amazon has scope to further expand its core e-commerce and cloud businesses. And it has moved further into media and advertising, giving the company a third potential growth path to explore.
As you saw above, Amazon is still (at worst) cheap today.
To answer the question: Long-term investors can still buy the stock today. Despite the strong development over the last year, it is not yet too late.
With this in mind, stocks, like any stock, can fall at any time. Therefore, consider a dollar-cost averaging strategy to slowly build a position to avoid getting caught in a market correction and running out of money to invest.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions on Amazon and recommends them. The Motley Fool has a disclosure policy.
Is it too late to buy Amazon shares? was originally published by The Motley Fool