As the new year approaches, many people are likely taking a look at their finances and reevaluating their investments. In an environment with high inflation and interest-rate hikes on the horizon, it's probably difficult for many investors to know what to buy as the investment needs to be extremely resilient. Further, carrying a large cash position is likely a bad idea since cash loses value during inflationary periods. So this intensifies the urgency for finding a good investment.
Individual stocks -- particularly ones that appear undervalued -- could prove to be a good idea for new capital going into the new year. One idea is Amazon (AMZN +0.34%), which is growing rapidly and possesses an extremely resilient business model.
Image source: Amazon.com.
Amazon's diversified business
One of the most attractive characteristics of Amazon stock is its diversified business. Of the company's $111 billion in third-quarter net sales, $50 billion came from online stores, $4.3 billion from physical stores, $24.2 billion from third-party seller services, $8.1 billion from subscription services, $16.1 billion from cloud computing, and $8.1 billion from "other" -- a segment that primarily consists of advertising revenue.
Even more, several of these segments are growing very fast. Third-party seller services, subscription, services, cloud computing, and "other" all saw their third-quarter 2021 revenue grow 13%, 19%, 24%, 39%, and 50% year over year, respectively. Showing how this makes the business resilient, this diversification helped offset a tough quarter for online stores (3% year-over-year growth) as the segment was up against tough year-ago comps when e-commerce sales surged amid lockdowns.
Investors buying into Amazon stock are getting access to a handful of attractive long-term opportunities.
Earnings momentum
While Amazon's trailing-12-month revenue growth rate of 32% does a great job of capturing the company's recent momentum, there's one important area where Amazon is growing even faster -- its bottom line. Amazon's trailing-12-month earnings per share is up 50% year over year.
This outsize growth in Amazon's earnings is key because it justifies the stock's high price-to-earnings ratio of 68. The reason its earnings have been growing faster than revenue (and will likely continue to do so in the coming years) is because Amazon is benefiting from significant operating leverage as it scales. Translation: Thanks to its previous investments to scale its business, Amazon is now at a point where revenue is growing faster than expenses.
To this end, analysts (on average) expect Amazon's earnings per share to grow at an average rate of 36% annually over the next five years.
An attractive entry point
While Amazon stock may seem expensive on the surface, thanks to its high price-to-earnings ratio, the company's earnings momentum and diversified business make the stock a great long-term inflation fighter for 2022. With multiple sales-growth vectors and operating leverage kicking in, the company's earnings per share should soar over the next five years, justifying strong growth in the stock price.
Of course, there are always risks that e-commerce growth decelerates faster than expected or Amazon's lead in cloud computing diminishes. But the stock's conservative valuation relative to the underlying business momentum makes these risks worth taking.
