Amazon has a lot going for it right now.
Amazon (AMZN 0.03%) is one of the latest additions to the $2 trillion valuation club. This exclusive group comprises only five companies, but these also happen to be some of the most dominant businesses on the globe.
While many in this group have strong investment cases, I believe Amazon’s case is just as good, if not better, than the rest. I’ve got three fantastic reasons why Amazon is a strong buy now and investors should consider adding its shares to their portfolios.
1. AWS is ramping back up
Unless you’ve lived under a rock, you’ve probably heard all about artificial intelligence (AI). A key part of AI is the computing infrastructure on which these models are run. Most companies don’t want to spend the money to build their own servers, so they rent computing power from cloud computing providers like Amazon Web Services (AWS).
AWS is the largest cloud computing provider by market share, but competitors have been nipping at its heels with the AI boom. However, Amazon’s first-quarter results may change that notion. In Q1, AWS revenue rose 17% year over year, which marks an acceleration from previous quarters. Management was very bullish on AWS’ prospects and sees it as a massive growth driver for years to come.
This is critical, as AWS is a massive part of Amazon’s profitability picture. Despite making up just 18% of Amazon’s total revenue, AWS provided 62% of profits. So, if AWS continues growing at a faster pace than the rest of the company, Amazon’s profits will rise at a much quicker pace — a fantastic sign for investors.
2. Profitability is increasing companywide
Although AWS is the main profit driver in the business, the commerce divisions have also picked up their game. Driven by the companywide effort championed by CEO Andy Jassy to become more profitable, the North American and international divisions have posted solid results.
| Division | Q1 2023 Operating Margin | Q1 2024 Operating Margin |
|---|---|---|
| North America | 1.2% | 5.8% |
| International | (4.3%) | 2.8% |
Data source: Amazon.
While that pales in comparison to AWS’ 38% operating margin, these two divisions are also in a more competitive industry with tighter margins. Regardless, the improvements in these divisions are being felt, and Amazon is producing record cash flow.
AMZN Free Cash Flow data by YCharts
This is only the beginning for Amazon. As margins keep improving and revenue growth continues, Amazon is slated to outperform the competition.
3. Advertising is leading the way
Amazon has launched many successful divisions in its tenure. AWS was the most successful, but advertising is giving it a run for its money.
In Q1, advertising revenue was $11.8 billion, up 24% year over year, good enough for Amazon’s fastest-growing division. While it’s less than half the size of AWS, it’s growing at a quicker pace.
This is just another addition to Amazon’s long list of successful launches and is undoubtedly helping Amazon’s profit margins in its commerce divisions, as advertising is known to be a highly profitable industry.
Amazon also has other irons in the fire, such as its pharmacy business and various AI products. Whether these end up being the next big division is irrelevant; Amazon will continue to launch new business endeavors it sees potential in. It has a long history of success with this activity, which is a critical factor when determining the staying power of an investment.
Amazon has a lot going for it, and I think now is just as good a time to buy as any. Investors would be wise to get in before the stock continues its upward trajectory.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.