It seems like Amazon (NASDAQ:AMZN) often gets forgotten about these days. A five-year return of 40% — around half that of the S&P 500 — certainly suggests so.
Yet, to my mind, Amazon is still one of the highest-quality shares around. Here are three reasons why.
E-commerce/data moat
Amazon is still familiar to most people for its leading e-commerce operation. And while that’s a tremendous business, it’s also quite low in terms of profit margins.
For example, looking at my recent Amazon purchases (a desk lamp, Mr Muscle drain unclogger, and a kid’s water gun), there won’t be a ton of profit made on those. Not when you factor in the logistical cost of getting them delivered to my front door the next day.
The real value, of course, comes from the habitual nature of these repeat purchases, fuelled by the Prime membership. And more specifically, the data this generates.
This underpins high-margin advertising revenue, including through Prime TV, which is now a large and profitable business in its own right.
Last year, Amazon’s ad revenue jumped 22% to $68.5bn. But CEO Andy Jassy has suggested that as Alexa+ moves into more complex conversations, there is a “significant financial opportunity” to incorporate advertising within that platform.
Optionality
If Amazon was just a standard e-commerce/ad play, I would be impressed but perhaps not overly bullish. However, the firm still has incredible optionality. In other words, it has many ways to keep on growing.
The main obvious way is through AWS, the world’s leading cloud computing platform. After a brief post-pandemic slowdown, AWS has exploded back into high-growth mode, growing sales 28% to $37.6bn in Q1.
This was its fastest growth in 15 quarters, and it now has an annualised revenue run rate above $150bn. In Q1, Amazon announced new AWS agreements with OpenAI, Anthropic, Meta, Nvidia, Uber, Southwest Airlines, U.S. Army, Bloomberg…
You get the picture — this is an incredibly important platform.
Additionally, Amazon has built a significant custom semiconductor business through its Trainium and Graviton chips. This has now topped a $20bn annual revenue run rate!
But it doesn’t end there. Amazon is also building a space satellite business, as well as operating a healthcare platform and advancing self-driving cars. Add in robotics, AI, delivery drones, and more, and this is still an innovative and ambitious company with attractive optionality.
An attractive valuation
Finally, we have what I consider to be an attractive valuation. Right now, Amazon is trading at 31 times forward earnings, but this falls to just 19 by 2028.
So, what’s the problem? Well, Amazon is spending a fortune building out AI infrastructure right now, and investors are uncertain about the return this capital expenditure will generate.
Additionally, AWS faces intense competition from Microsoft Azure and Google Cloud. And there are rivals in global e-commerce, all hungry for a share of the pie.
So, this isn’t a risk-free stock. But I think it currently looks very attractive relative to the long-term growth opportunities.
In the coming weeks, I’m likely to (finally) add the stock to my portfolio, and I think investors should consider doing the same.
Should you invest £5,000 in Amazon right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Amazon made the list?
Ben McPoland owns shares in Nvidia and Uber.
