When a stock skyrockets, it’s natural to wonder if it’s still a worthy buy. While it might seem like such momentum can’t last forever, overlooking stocks that have shown immense growth could mean missing out on a lucrative investment opportunity.
Every market winner deserves a case-by-case analysis before deciding to buy, sell, hold, or avoid. With this in mind, let’s scrutinize the e-commerce and cloud computing behemoth Amazon (NASDAQ: AMZN), a stock that soared by 80% last year. The question at hand: Is Amazon still a buy?
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Revamped Cost Structure
In the wake of a challenging 2022, Amazon made a roaring comeback in 2023 after facing its first annual loss in nearly a decade. The company battled through obstacles including the strain of higher interest rates and overcapacity across its fulfillment network. To turn the tides, Amazon diligently overhauled its cost structure.
The e-commerce giant shed tens of thousands of jobs, honed efficiency across its operations, and redirected investments to burgeoning areas such as technology infrastructure, essential for supporting its cloud computing arm, Amazon Web Services (AWS). Additionally, Amazon transitioned its U.S. fulfillment model from a national approach to a regional one, resulting in swifter and more cost-effective deliveries.
Consequently, Amazon reported quarterly profits and steadily enhanced other financial metrics. By the third quarter, the company declared a double-digit surge in sales to $143 billion, a more than threefold jump in net income, and a significant upswing in free cash flow from an outflow of over $21 billion in the previous year.
This restructuring is not merely a cushion for challenging times but a strategy to bolster Amazon’s customer base, manage costs effectively, and perpetuate long-term growth. These efforts could translate into profits and share-price escalation, even during rosier economic conditions.
Dual Victories for Amazon
For instance, by making crucial inventory items accessible in eight regions nationwide, Amazon is able to trim its cost to serve. Swift deliveries also increase the likelihood of repeat business, delivering a two-pronged victory for Amazon and fortifying its dominance in the flourishing e-commerce sector.
Another testament to Amazon’s prowess is its investments in artificial intelligence (AI). The company harnesses AI to optimize warehouse operations and furnishes AWS clients with platforms to launch their own generative AI projects without arduous groundwork.
This is made feasible through services like Amazon Bedrock, a platform providing companies access to foundational models that can be tailored to their needs. As the leading cloud computing services provider globally, AWS’s emphasis on AI is poised to help it maintain its position.
All these dynamics point to Amazon’s robust potential to gain ground over time. Analyst forecasts predicting a growth rate of more than 79% annually over the next five years further underscore this.
But could the stock witness a short-term surge as well? Amazon has just begun reaping the rewards of its cost-structure improvements and other initiatives.
In the latest earnings report, CEO Andy Jassy remarked, “We have a long way before being out of ideas to improve cost and speed” of delivery. Considering Amazon’s diverse business scope encompassing e-commerce and cloud computing, it stands to benefit as economic pressures lift.
Thus, Amazon is currently trading at 43 times forward earnings estimates, roughly half of its valuation by this measure a couple of years ago, making it reasonably priced. Hence, this top technology stock is still an excellent buy, even post its staggering surge last year.
Should you invest $1,000 in Amazon right now?
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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. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
