Assuming Amazon’s recent trip to all-time highs makes the stock expensive could be a costly mistake.
E-commerce and technology giant Amazon (AMZN 0.52%) recently reported its second-quarter earnings. The company’s results exceeded Wall Street’s expectations in some areas while missing in others. Overall, it’s probably fair to call it a mixed bag. Additionally, earnings news dropped amid the stock market’s worst two-day sell-off in recent memory. As a result, shares went from an all-time high to dropping over 15% in short order.
So, the question is: What now?
Amazon didn’t give investors the perfect quarter, but there is enough business momentum to make the stock a table-pounding buy after this abrupt sell-off. Here are three reasons to buy the stock right now:
1. AWS’ momentum is better than expected
Most consumers associate Amazon with its e-commerce business, but Amazon Web Services (AWS), the company’s cloud platform, is Amazon’s most profitable business by a wide margin. Not only is cloud computing a multidecade growth trend, but artificial intelligence (AI) applications run through the cloud, making the company’s cloud performance arguably Wall Street’s most significant focus when looking at Amazon.
Amazon’s year-over-year cloud revenue growth rate accelerated from 17.2% in Q1 to 18.8% in Q2, driven by AI demand. Analysts had expected 17.6% growth, so AWS performed over a percentage point better than expected. Amazon needs to compete in AI. It’s fighting competition from Microsoft and Alphabet to maintain its leading global market share, estimated at 31%.
CEO Andy Jassy spoke about AI efforts on the call, pegging its AI revenue at a multibillion-dollar run rate. Jassy also discussed a shift in customer needs. Initially, Amazon and other companies jumped headfirst into AI and relied on Nvidia‘s chips to build the computing power needed to train and operate AI models. However, consumers are looking for more cost-competitive services, which Amazon is responding to with custom in-house AI chips to save money.
It’s encouraging (though not surprising) to see Amazon invest in adapting to its customers’ computing needs. According to estimates from Grand View Research, the global cloud computing opportunity could grow to over $2.3 trillion by 2030. AWS is pacing for just over $100 billion in revenue this year as the top global platform. A lot of growth is up for grabs, so it’s great to see AWS performing better than expected and positioning itself to provide better services at lower prices.
2. Amazon is gushing cash flow
Amazon’s revenue guidance for next quarter fell short of analysts’ expectations, which may have contributed to the stock’s sell-off. This probably shouldn’t concern long-term investors. Consumer-facing companies across Wall Street have rung the alarm that consumers are pulling back more than expected, so why wouldn’t it be the same for online shopping?
Amazon’s financial performance is far more critical for long-term investors. As you can see, Amazon’s cash profits from day-to-day operations and free cash flow have soared to all-time highs:
AMZN Cash from Operations (TTM) data by YCharts
Remember, free cash flow accounts for capital investments into the business, so this is after accounting for any money Amazon is pumping into AWS to support AI growth.
3. Shares are a bonafide bargain
Amazon’s cash-flow explosion makes the stock a juicy bargain, even after the stock ran to all-time highs just a week ago.
It becomes glaringly obvious when you compare Amazon’s cash flow to its stock price:
AMZN Price to CFO Per Share (TTM) data by YCharts
On a free-cash-flow basis, arguably the primary driver of a stock’s intrinsic value, Amazon is nearly the cheapest it’s been in a decade despite massive investments in AI. Go by operating cash flow, and it’s a firm decade-low. Amazon is even cheaper than during the COVID-19 market crash in 2020.
Simply put, Amazon was a no-brainer before market volatility gave it a quick haircut from its recent high. Don’t let Amazon’s recent run to all-time highs trick you; the stock remains a bargain.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.