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Buying Amazon Could Be the Smartest Thing You Ever Do

By Will Healy - Jun 8, 2021 at 7:30AM

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A solid business and continued growth mean the Amazon story is far from over.

Amazon (AMZN -1.48%) continues to gain attention as it sets sales records and opens new lines of business. However, due to its large size, many investors might wonder whether they have missed the boat on this consumer discretionary stock. Fortunately, thanks to a competitive edge in retail and other businesses, Amazon could remain one of the smartest investments for the average stockholder.

An online shopper holding a credit card while getting ready to make a purchase via a laptop.

Image source: Getty Images.

The Amazon edge

Amazon is a smart stock because it succeeds in so many areas. Most consumers know it best as the e-commerce stock that seems to sell "everything." That assertion appears to become less of an exaggeration as time goes by. The company's latest move will take Amazon into the pharmaceutical business.

Like Amazon's past retail initiatives, this move has inspired fear among its competitors. They have good reasons for their concerns. Amazon can afford to run losses in this business thanks to Amazon Web Services (AWS). Despite a history as a retailer, Amazon found success in pioneering the cloud infrastructure business. Today, it continues to lead that business, maintaining a higher market share than peers such as Microsoft and Alphabet, according to ParkMyCloud.

Moreover, it remains the best performing segment of the company. Its North America and international retail segments reported operating margins of 4.2% and 2%, respectively, over the last 12 months. However, AWS's operating margin came in at 30% over the same period. The AWS segment continues to generate more net income than the North America and international segments despite its lower revenue.

Furthermore, this combined retail and cloud success has taken its market cap to about $1.6 trillion. This makes it the 3rd largest company by this measure, as it lags only Apple and Microsoft.

Amazon remains a revenue and cash flow machine

Additionally, that size does little to slow Amazon down. In the first quarter of 2021, net sales surged 44% from year-ago levels to $108.5 billion. This helped to take the quarterly net income of $8.1 billion higher by 220% during that period. This includes the $1.7 billion Amazon earned from non-core sources. Also, the company limited the increase in operating expenses to 41%, allowing for the massive earnings increase. Investors should note that this exceeds the 38% rise in net sales and the 84% net income surge in fiscal 2020.

Like many retailers, it has not provided full-year guidance for 2021 as the U.S. emerges from the pandemic. Nonetheless, Amazon expects a net sales increase of between 24% and 30% in the upcoming second quarter compared with Q2 2020. Moreover, the fact that the dates for Prime Day 2021 fall in this quarter could boost revenue further.

Stockholders should also note that Amazon generated a free cash flow of $26.4 billion over the last 12 months, an 8% surge from the previous 12-month period. Amazon spent $45.4 billion for property and equipment over the previous 12 months, more than double the $20.4 billion spent over the last period. Nonetheless, while that spending limited the increase in cash flows, the $73.3 billion in liquidity gives Amazon one of the most robust balance sheets in existence.

Investors have responded by taking Amazon stock higher by about 30% over the last year. Moreover, with a P/E ratio of about 60, its earnings multiple has fallen to multi-year lows. With stock increases lagging the growth rate of net income, Amazon has now become more affordable despite a stock price of more than $3,200 per share.

AMZN Chart

AMZN data by YCharts

Consider Amazon

Amazon's retail and cloud success position the company to both weather storms and build market share. Additionally, it continues to post triple-digit income increases despite its massive size. Its expanse may prevent Amazon from outpacing smaller growth companies. Nonetheless, the rising income makes it likely the stock will continue to produce meaningful returns for years to come.

John Mackey, 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. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Microsoft. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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Stocks Mentioned, Inc. Stock Quote, Inc.
$140.58 (-1.48%) $-2.11
Microsoft Corporation Stock Quote
Microsoft Corporation
$287.12 (-0.70%) $-2.04
Alphabet Inc. Stock Quote
Alphabet Inc.
$118.77 (-0.78%) $0.94
Apple Inc. Stock Quote
Apple Inc.
$168.34 (-0.53%) $0.90
Alphabet Inc. Stock Quote
Alphabet Inc.
$119.69 (-0.80%) $0.96

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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