Both of these iconic investors own Amazon stock.
Artificial intelligence (AI) is dominating the technology sector right now, and one company that stands to benefit greatly is e-commerce and cloud computing leader Amazon (AMZN -2.33%). Roughly halfway into 2024, shares of Amazon have soared by 23% — handily topping the 15% year-to-date gain of the S&P 500 and the 19% rise of the Nasdaq Composite.
Yet even in the wake of this strong performance, Doug Anmuth of JP Morgan Chase thinks Amazon stock could rocket by another 28% over the next 12 months.
Amazon’s cash-flow empire
Two of the most closely followed institutional investors are Berkshire Hathaway CEO Warren Buffett and Ark Invest CEO Cathie Wood.
Admittedly, Wood and Buffett don’t have a lot in common when it comes to their investment styles. Buffett’s portfolio is dominated by blue chip businesses with consistent cash flows. By contrast, Wood often takes positions in companies that operate in emerging technologies such as genomics, space exploration, and different aspects of the tech realm.
One stock that they both own, though, is Amazon. While those positions are relatively small compared to their other holdings, I’m intrigued that these two have any overlap across their respective portfolios.
One of the reasons that I think both Buffett and Wood own Amazon has to do with its cash flow. Many growth companies (especially in technology) burn cash for long periods in pursuit of accelerated revenue growth.
Amazon, however, now generates a staggering level of profit. For the 12-month period that ended March 31, the company increased its operating cash flow by 82% year over year to $99 billion. Moreover, Amazon’s free cash flow over that duration was a whopping $50 billion.
While it’s the company’s robust free cash flow that likely attracts an investor like Buffett, it’s how management is investing these excess profits that I think piques the interest of Wood.
Image source: Getty Images.
These AI investments should not be overlooked
Like many of its big tech peers, Amazon has been aggressively pursuing all things AI over the last year or so.
The first major move the company made on that front was a $4 billion investment in Anthropic, a competitor to OpenAI. In addition, Amazon is an investor in machine-learning start-up Hugging Face. Moreover, back in April, the company announced an $11 billion infrastructure project to build out data centers in Indiana.
I see all of these moves as pieces of a larger puzzle. Namely, all of these assets should play important roles as the company begins rolling out additional AI features across its ecosystem. The Amazon Web Services (AWS) cloud computing platform stands to benefit greatly from these AI investments, as do its legacy e-commerce business and fast-growing advertising operation.
Should you invest in Amazon stock right now?
While Anmuth’s price target of $240 might tempt you to buy Amazon stock, I wouldn’t get too hung up on particulars.
Instead, investing in Amazon should be rooted more in a strong conviction that AI represents a new frontier for the technology sector at large. Moreover, allocating a position of your portfolio to Amazon would suggest that you’re optimistic the company can emerge as a leader in the AI landscape.
As I’ve expressed in previous articles, given Amazon’s diverse set of businesses and its ability to leverage AI across its ecosystem, I think the company is going to dominate for years to come.
AMZN Price to Free Cash Flow data by YCharts.
If you look at the chart above, you’ll notice something interesting about Amazon’s price-to-free-cash-flow (P/FCF) multiple. Namely, the metric surged to excessive levels and then disappeared during 2022 and part of 2023. That is because Amazon was burning cash during this period, thereby rendering P/FCF meaningless.
However, as the company currently generates consistent cash flow, the multiple has started to normalize. What I find most intriguing about the trend above is that the company’s P/FCF multiple of 43 is about half its 10-year average.
This is hard to believe. Amazon is a much different, larger, and more sophisticated business today than it was a decade ago. However, the valuation trends above would imply that Amazon stock is more reasonably valued today at its current price.
Considering the long-term tailwinds AI represents, as well as the company’s numerous investments in the space and the impacts these could have on its future prospects, I think buying Amazon stock right now is a no-brainer.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, and JPMorgan Chase. The Motley Fool has a disclosure policy.