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My Top Stock to Buy in the September Sell-Off

By Daniel Sparks – Updated Sep 27, 2021 at 10:02AM

Key Points

  • Amazon's operating margin has been steadily expanding.
  • Analysts expect the e-commerce giant's earnings to soar over the next five years.
  • Rapid growth from advertising could contribute meaningfully to Amazon's long-term growth story.

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The fast-growing e-commerce and cloud-computing company is trading at an attractive valuation.

The S&P 500's bullish run higher in 2021 seems to be taking a breather in September. The market index is down about 1.5% month-to-date. Some tech stocks have seen even steeper declines, evidenced by the tech-heavy Nasdaq Composite's 1.8% pullback during this period.

The market sell-off has made some stocks more attractive. One growth stock that has declined recently and is worth a closer look today is Amazon (AMZN -0.77%). The e-commerce and cloud-computing giant's stock may look expensive at first glance. But a closer look at its underlying fundamentals shows a very compelling investment opportunity.

Charts on a chalkboard and smartphone.

Image source: Getty Images.

Explosive bottom-line growth

With a $1.7 trillion market capitalization, it may be difficult to imagine how the company's shares could rise significantly over time from here. Furthermore, the company's high price-to-earnings ratio of 59 may scare some investors off. After all, that's nearly twice as high as the average P/E for stocks in the S&P 500. 

But investors should realize that Amazon's earnings are soaring, easily justifying a high price-to-earnings ratio. The company's trailing-12-month earnings per share of $57.43 today is up from 23.01 in 2019 and just $6.15 in 2017. Furthermore, analysts predict more strong earnings-per-share growth in the years ahead. Specifically, the current average analyst forecast is for Amazon's earnings per share to grow about 36% annually over the next five years.

This earnings momentum, of course, is helped by a combination of strong revenue growth and the inherent operating leverage that comes with scaling e-commerce and cloud computing businesses. Highlighting how Helping Amazon send more of its revenue to its bottom line, the company's trailing-12-month operating margin has expanded from 5.2% one year ago to 6.7% today. 

Significant optionality

Also aiding the case for Amazon stock is the company's sprawling operations, giving the company optionality to grow in various vectors. This broad-based business strength helps both create incremental revenue upside potential and mitigate some of the risk of Amazon's revenue growth tapering off too quickly. While Amazon's online stores segment grew nicely in the company's most recent quarter, with a year-over-year growth rate of 16%, the company is also seeing robust revenue growth rates in third-party seller services (38%), physical stores (11%), subscription services (32%), cloud computing (37%), and "other" (87%).

Amazon's "other" segment, in particular, is worth calling out as a key growth opportunity. Management has said the primary driver to the segment is Amazon's fast-growing advertising business. The nascent business is not only growing faster than Amazon's consolidated revenue, but it boasts a higher profit margin.

"Amazon advertising is innovating at a fast clip, launching over 40 new features and self-service capabilities in the quarter, making it easier for sellers, companies and authors to grow their businesses by helping customers discover their brands and products," said Amazon Chief Financial Officer Brian Olsavsky in the company's most recent earnings call

With broad-based momentum across its business and significant operating leverage, Amazon stock looks like it could perform well over the long haul from its current level -- and a recent pullback in the e-commerce giant's shares gives investors a good entry point.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any of the stocks mentioned. His clients may owns hares of the companies mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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