Amazon is generating so much cash, it’s not even funny. But where is the company investing it?
E-commerce and cloud-computing giant Amazon (AMZN 3.90%) is one of my favorite businesses. The company’s diversified business model, strong brand recognition, and robust financial profile make it a no-brainer choice for growth investors.
For most of the last year, the majority of chatter surrounding Amazon has revolved around artificial intelligence (AI). And while I acknowledge the company is making some savvy moves in the AI realm, I have a prediction for something else that Amazon may have up its sleeve.
Let’s dig in.
Amazon is a cash-flow machine
Amazon generates revenue from several sources. According to the company’s filings, Amazon reports revenue into the following categories: online stores, physical stores, third-party seller services, advertising, subscriptions, cloud computing, and other services.
The majority of Amazon’s operating income comes from its cloud services, Amazon Web Services (AWS). This isn’t entirely surprising. While e-commerce and retail are the biggest revenue drivers, profitability margins in these segments can fluctuate dramatically in any given quarter.
Nevertheless, a close look at Amazon’s financial statements reveals just how profitable the overall business really is. For the quarter ended March 31, Amazon reported $15.3 billion in operating income — an increase of 219% year over year.
Moreover, free cash flow has ballooned to $50 billion on a trailing-12-month basis, while operating cash flow has soared 82% over the same time period — reaching $99.1 billion.
Image source: Getty Images.
What could Amazon use its cash for?
Throughout 2024, investors have gained some insight into how Amazon is deploying its cash. After completing a $4 billion investment into AI start-up Anthropic, Amazon swiftly announced another initiative — an $11 billion infrastructure project to build data centers in Indiana.
Obviously, these investments carry a hefty price tag. But all things considered, neither of them even puts a dent in Amazon’s staggering cash pile, which currently sits at roughly $85 billion. Although this is a rather bold prediction, I think Amazon will begin using its excess profits to more directly reward shareholders in the form of a dividend.
Not only does Amazon have the financial horsepower to pay a dividend, but peers including Alphabet and Meta Platforms both initiated their own dividends earlier this year. Furthermore, “Magnificent Seven” peer Nvidia recently raised its dividend by 150% as noted during the company’s latest-earnings report.
The bottom line
As of now, only Amazon and Tesla remain as the two Magnificent Seven members that do not pay a dividend. On top of that, many of Amazon’s megacap peers also compete in the AI world and offer leading cloud-computing alternatives. Since they also pay a dividend, Amazon may not seem as enticing for big tech investors.
At the end of the day, I cannot say if or when Amazon could initiate a dividend. However, considering the company’s mammoth heaps of cash and strong tailwinds across many different growth markets, I think its management should be considering the prospects of a dividend given how feasible it is from a financial perspective.
With all of this said, I’d caution investors from buying Amazon shares on speculation that it could one day become a dividend stock. As explored above, the company’s diversified business and massively profitable operation are more concrete reasons to scoop up shares in Amazon and hold on for the long haul.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet, Amazon, Meta Platforms, Nvidia, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Nvidia, and Tesla. The Motley Fool has a disclosure policy.