Is Amazon Stock a Buy?
Amazon (NASDAQ: AMZN) is about to give investors a much clearer picture of its business. The e-commerce and web services giant will announce second-quarter earnings results in early August. The report is likely to show gathering momentum on sales and profits, and that's a big reason why the stock soared so much in 2023.
Let's take a look at what investors might expect to hear from Amazon's management team on Aug. 3, along with a few reasons to consider buying the stock – and one reason to be cautious.
The green shoots in Amazon's business
Amazon's Q1 report (released in late April) contained mixed news on its sprawling business empire. On the downside, product sales were flat in the e-commerce segment as consumers continued to pull back on discretionary spending and on the digital sales channel in general. Yet that modest result still indicated Amazon performed well above many of its peers. Costco Wholesale has been reporting declining e-commerce sales for several quarters, for example, including a 10% year-over-year drop in fiscal 2023's Q3 (ended May 7).
Amazon's services segment saw strong growth, meanwhile, with AWS expanding by 16%. The company saw more demand for products like Prime shipping and seller advertising, too, allowing overall sales to rise 9%. "There's a lot to like about how our teams are delivering for customers, particularly amid an uncertain economy," Amazon CEO Andy Jassy told investors in April.
Follow the cash
Operating income has been on the upswing, mainly thanks to Amazon's efforts to cut its costs as online ordering slowed. Earnings are volatile for this capital-intense business, though, and often don't provide the clearest picture of its profit potential.
AMZN Cash from Operations (TTM) data by YCharts
Instead, investors should follow long-term trends on cash flow, which have been impressive. Operating cash rose 38% to $54 billion over the past 12 months compared to the prior year period. Gains in this arena signal excellent earnings growth ahead, but they also mean Amazon is free to invest heavily in large growth initiatives like its cloud services and artificial intelligence (AI). That's how the company will maintain and expand its excellent market share position.
The reason for caution on Amazon
Amazon's stock valuation jumped in 2023, potentially limiting investors' returns from here. You now have to pay about 2.5 times annual sales for this business, up from about 1.7 at the start of the year. That's still well below the peak valuation of nearly 5 that investors saw during the pandemic, for context.
Most Wall Street pros are looking for sales to rise by about 8% year over year in Amazon's upcoming earnings report as earnings swing to positive territory compared to losses a year ago. The bigger question is what executives will have to say about rebounding growth trends in both the e-commerce and services segments. The main risk is that demand will be sluggish here, potentially delaying the company's overall recovery from the post-pandemic slowdown.
Still, the benefits seem to outweigh the risks with this stock. Amazon has exposure to many large growth niches, and the stock's valuation seems reasonable given those bright prospects. If you don't mind volatile and often low annual earnings, then consider adding the stock to your portfolio today.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Demitri Kalogeropoulos has positions in Amazon.com and Costco Wholesale. The Motley Fool has positions in and recommends Amazon.com and Costco Wholesale. The Motley Fool has a disclosure policy.
