Warren Buffett’s holding company, Berkshire Hathaway, controlled 10 million shares of Amazon (NASDAQ: AMZN) last September, valued at around $1.6 billion. While not a top holding, this substantial investment is indicative of confidence in Amazon’s future prospects.
Amazon’s stock has experienced a remarkable 75% surge from the low point it hit last March. However, analysts on Wall Street believe that the stock may have more room to grow, with a consensus price target suggesting a potential further climb of 15% over the next 12 months. Despite the optimistic forecasts, it’s critical for investors to exercise caution and understand the implications of these targets, especially in light of the potential for downward adjustments by investment bank analysts.
Image source: Getty Images.
Examining recent developments provides valuable insights into the potential of Amazon’s stock as a viable investment option.
Amazon’s Return to Profitability
Amazon’s heavy investments during the early phase of the COVID-19 pandemic resulted in steep losses in 2022. However, long-term investors have been rewarded for holding the stock, as the company has managed to swing back to profitability.
Driven by improved operational performance, Amazon’s free cash flow reached $36.8 billion last year, a drastic turnaround from the $11.6 billion outflow in 2022. Additionally, the company reported a 12% year-over-year increase in total revenue, supported by double-digit percentage gains from all three of its operating segments. The accelerating growth was evidenced by a 14% year-over-year rise in fourth-quarter sales, fueled by a record-breaking holiday shopping season.
Positioning for the AI Gold Rush
Amazon Web Services (AWS) currently leads the cloud-computing services market. The rising popularity of generative artificial intelligence applications, such as ChatGPT, presents a significant opportunity for further expansion in the coming years. Notably, AWS contributed 14% to Amazon’s total sales but accounted for a substantial 55% of total operating income in the fourth quarter, highlighting its potential for profitability.
Furthermore, Amazon is strategically positioning AWS to be a leading service provider for businesses looking to develop, market, or utilize advanced AI applications. By offering access to Nvidia’s GH200 Grace Hopper Superchips, Amazon is catering to a diverse range of clientele, from those seeking high-performance chips to cost-conscious businesses, with the introduction of its proprietary Trainium2 chips.
An Unrivaled E-Commerce Platform
Amazon’s substantial investments in upgrading and expanding its logistics network during the early days of the COVID-19 pandemic have cemented its position as an indispensable partner, particularly in providing ultra-fast shipping, a feature that sets it apart from competitors. In 2023, Amazon delivered over 7 billion packages with same-day or next-day service and now operates more than 55 dedicated same-day sites across the U.S., with a remarkable 65% year-over-year increase in items shipped through these sites in the fourth quarter.
Besides efficient shipping, the $14.99-per-month Amazon Prime membership presents additional value, offering services such as access to primary care services from One Medical for an extra $9 per month.
Is It a Buy Now?
While Amazon’s stock remains an attractive investment, the current high valuation, with its shares trading at more than 47 times forward-looking earnings estimates, may entail higher levels of risk. Despite this, Amazon possesses the potential to overcome its high valuation and realize substantial gains over the long term. However, there are no guarantees, and caution is advised, particularly for investors with lower risk tolerance.
Before making any investment decisions, it is advisable to consider all available information and weigh the potential risks against the expected returns.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Cory Renauer has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, and Nvidia. The Motley Fool has a disclosure policy.