Owning Amazon (NASDAQ: AMZN) stock has been a roller coaster ride in recent years. After shooting upwards during Covid, the stock came crashing back down last year as the company’s growth slowed.
Is the US-listed growth stock worth buying today? I think so. Here are three reasons why.
Enormous growth potential
Last week, I read Amazon’s 2023 annual letter to shareholders. And the first thing that struck me was that this is a company that still has huge growth potential.
Let’s start with online shopping. Amazon has built up an enormous e-commerce business (sales of $430bn+ last year) over the last few decades. However, CEO Andy Jassy noted in the annual letter that roughly 80% of global retail sales today still take place in physical stores. This suggests there’s significant room for growth here.
It’s a similar story with the cloud computing side of the business. Last year, Amazon Web Services brought in revenue of $80bn. Yet Jassy noted that around 90% of global IT spending today is still ‘on-premise’ and yet to migrate to the cloud. So, this area of the businesses is still in its early days.
I strongly believe that our best days are in front of us.
Amazon CEO Andy Jassy
There’s a lot more to Amazon than just e-commerce and cloud computing though.
Another area of the business that looks to have a lot of growth potential is digital advertising. Amazon has an edge here because it can target shoppers with highly-customised ads.
Artificial intelligence (AI) is also a very promising area. Amazon is a leader in the AI space and it’s set to offer a service called ‘Bedrock’ that will let customers build their own generative AI tools (similar to ChatGPT). It believes its technology has the potential to improve “virtually every customer experience”.
Overall, the future looks incredibly exciting, in my view.
Cost-cutting
Another reason to be bullish here, however, is that the company is in cost-cutting mode.
Recently, Amazon cut the most jobs in its near 30-year history, letting go of 27,000 employees through multiple rounds of layoffs.
However, this is just the beginning.
In the annual letter, Jassy said that over the last few months, he’s been taking a deep look across the organisation to examine whether each unit has the ability to generate enough revenue, operating income, free cash flow, and return on invested capital.
And in some cases, this has led to the closing down of businesses.
If Amazon can get this cost cutting right, it could have a big impact on profits and the share price.
Lower valuation
Finally, the valuation here is no longer insanely high.
If we take next year’s earnings forecast of $2.51p per share, this forward-looking P/E ratio is about 40.
Yes, that’s well above the market average (which adds risk).
But is it crazy for a growth company that has dominant positions in multiple industries?
I don’t think so.
A top long-term buy
Now, there are some other risks here, particularly in the short term.
One is rising fulfilment costs. Another is lower levels of cloud spending from businesses. Both have the potential to impact earnings negatively.
However, taking a long-term view, I think Amazon is a great stock for investors to buy today.
The post 3 reasons Amazon stock is a ‘buy’ today appeared first on The Motley Fool UK.
Should you buy Amazon shares today?
Before you decide, please take a moment to review this first.
Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.
It’s called ‘5 Stocks for Trying to Build Wealth After 50’.
And it’s yours, free.
Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.
And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.
That’s why now could be an ideal time to secure this valuable investment research.
Mark’s ‘Foolish’ analysts have scoured the markets low and high.
This special report reveals 5 of his favourite long-term ‘Buys’.
Please, don’t make any big decisions before seeing them.
Claim your free copy now
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
Just released: the 3 best growth-focused stocks to buy in April 2023 [PREMIUM PICKS]
If I’d invested $1,000 in Amazon stock 5 years ago, here’s how much I’d have now!
Ed Sheldon has positions in Amazon.com. The Motley Fool UK has recommended Amazon.com. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.