Amazon(NASDAQ: AMZN) stock had a great run in 2024. The shares are up 48% year-to-date at the time of writing. Some might assume that Amazon’s $2.37 trillion market cap will make it difficult for the company to deliver the wealth-building returns it delivered in the past. While that might be true, Amazon has an incredibly strong competitive advantage in e-commerce, and the stock appears undervalued on the basis of its growing cash flow.
Here are three reasons the stock is a solid buy heading into 2025.
Amazon has one of the widest competitive moats within the retail industry. Amazon has won over 200 million Prime members through a convenient shopping experience across a massive selection of inventory. It continues to invest in ways that further solidify its loyal customer base and establish a stickier platform for shopping, including its recent push into same-day delivery and upcoming rollout of its pharmacy delivery service.
“At a time when consumers are being careful about how much they spend, we’re continuing to lower prices and ship even more quickly, and we can see this resonating with customers as our unit growth continues to be strong and outpace even our revenue growth,” CEO Andy Jassy said on the Q3 earnings call.
Amazon has grown into a massive retail business, with $262 billion in trailing-12-month sales from online and physical stores. There’s still a tremendous long-term opportunity to keep growing, given that global e-commerce sales are estimated at around $6 trillion, according to Statista, with the entire global retail market valued at $30 trillion.
Another way Amazon is solidifying its lead in e-commerce is through new AI shopping tools. It rolled out its AI shopping assistant Rufus in September, which could help convert more sales by helping customers more easily find what they are looking for. This shows how Amazon’s lead in cloud computing benefits the whole company.
Amazon Web Services (AWS) continues to hold the No. 1 spot in the $300 billion cloud services market, with revenue up 19% year over year in Q3 on a currency-neutral basis. Much of this growth is being driven by organizations moving their data systems over to the cloud to take advantage of AI services.
AWS generated $10 billion in operating income last quarter, comprising most of Amazon’s profit. With the cloud market overall still growing at double-digit rates, the growing demand for AI services in AWS is one of the best reasons to invest in Amazon.
Amazon stock has created tremendous wealth for shareholders over the last few decades. A $10,000 investment in the shares in 2004 would be worth almost $1 million today. Amazon’s strong growth in cash from operations, or operating cash flow, helped fuel those returns, but the stock is still trading at a reasonable multiple of its cash flow that could support more new highs.
In 2004, the stock traded at about 30 times Amazon’s cash from operations (CFO) on a per-share basis. Over the last 20 years, the stock’s average price-to-CFO multiple was 27, but investors can buy the stock at a multiple of 21 at the current share price of $219.
Amazon appears undervalued when comparing its price-to-CFO valuation to competing retailers like Walmart and Costco Wholesale. Walmart currently trades at a P/CFO multiple of 19, while Costco trades at an expensive 42 multiple. Amazon deserves to trade at a significant premium to both stocks since it has a long history of growing earnings and cash flow at higher rates and still has tremendous growth potential in e-commerce and cloud services.
In addition to AWS, Amazon’s profitability is also benefiting from management’s focus on lowering costs in the retail business. Operating cash flow increased 57% year over year to a new high of $112 billion on a trailing-12-month basis.
While investments in growth initiatives will cause lumpy results in cash flow from year to year, the growth of Amazon’s business over the long term makes it a solid investment.
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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. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, and Walmart. The Motley Fool has a disclosure policy.
