After occupying a spot on my watch list for a long time, I finally bought shares of Amazon (AMZN -1.54%). This isn't the first time I've owned Amazon; I originally bought the stock about a decade ago and sold it for a significant profit about five years ago.

I certainly left some gains on the table -- the stock continued to climb through the pandemic in 2020 -- and I won't lie and pretend I wasn't kicking myself a bit during 2020 and 2021 as the stock essentially doubled again. But you can never regret booking a profit.

Now, after a decline of 50% this year, Amazon shares are not only trading right at their 52-week low, they also have essentially given back all of the gains that they made over the past two years and are trading at pre-pandemic levels. So the opportunity to add this juggernaut back into my portfolio at this level was too tempting to pass up.

An Amazon delivery driver brings a package to a house.

Image source: Getty Images

The ultimate litmus test

When looking at a stock that I'm considering buying, I often think of Motley Fool co-founder Tom Gardner's "snap test," in which he asks, "What would the world be like if you were to snap your fingers and the business were to disappear?"

This is the way to determine if a business is essential to people's lives. In the case of Amazon, I think we can unequivocally say that people would notice if it vanished, and for the most part, it would be a net negative for their day-to-day lives.

I would certainly notice, considering that I receive periodic shipments of everyday staples like laundry detergent and cases of water, buy Christmas gifts that I know will arrive on time, and watch Amazon Prime with my kids (not to mention the NFL on Prime on Thursday nights). And there are many others who use its services even more extensively than I do.

Here's how you know that Amazon is a strong business with significant pricing power. I've had Prime for a number of years, and when Amazon increased the long-standing $99 annual membership price to $119 in 2018, I was surprised, but I kept paying. When the price increased again to $139 per year in 2022 (from $119), I wasn't thrilled, but I continued to pay without a thought of canceling it.

Legendary investor Peter Lynch famously told investors to invest in what they know. And in this case, Amazon is a business that I know well, and one that I am willing to keep paying for its services.

The stock isn't cheap, but I'm in good company

Shares of this former highflier are down 49% in 2022, and just over 50% from their 52-week high. While it is exciting to buy shares of Amazon at their lowest price since before the pandemic propelled them to unprecedented levels, this doesn't mean that Amazon is "cheap." In fact, shares still look fairly expensive at about 42 times forward earnings.

Many stocks in my portfolio trade at price-to-earnings (P/E) multiples in the teens or even single digits, so Amazon is a bit of an outlier for me here. While it certainly isn't a value stock, the company is profitable, unlike many of the tech companies that have sold off this year.

Furthermore, while 50 times earnings is prohibitive, I believe that Amazon will continue to grow earnings for the foreseeable future, which will make the valuation more palatable over time. 

I feel good about the fact that Amazon is held by quite a few prominent value investors, who also put the stock's high P/E aside and bought it. For example, Amazon is the second largest holding of Miller Value Partners, run by the legendary value investor Bill Miller. He beat the S&P 500 for 15 years in a row from 1991 to 2005 as the chief investment officer at Legg Mason.

Amazon is also a top holding for Markel, a company that many observers believe Thomas Gayner is building into a mini Berkshire Hathaway. Oakmark's Bill Nygren, another notable value investor, is also a buyer.

Advertising: the hidden gem?  

While its cloud business, Amazon Web Services (AWS), generates plenty of headlines, I'm particularly intrigued by the company's less-discussed advertising business. During the most recent quarter, revenue for the advertising segment grew 25% year over year.

Among the FAANG stocks, we more often think of Meta Platforms (NASDAQ: META) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) when it comes to advertising. But Amazon is particularly attractive for advertisers since consumers are already going to the platform intending to buy a specific type of product. Amazon is native to shopping and has an abundance of data points about its consumers to offer to advertisers. 

Because advertising and AWS are more profitable and faster-growing than Amazon's e-commerce business, this means that over time, earnings per share should accelerate as these segments make up a larger portion of its business.  

Looking ahead  

Shares of Amazon still aren't cheap, but are trading right at their 52-week low (as well as at pre-pandemic levels). So I took the opportunity to add this stock that unequivocally passes the "snap test." As earnings accelerate based on advertising and AWS accounting for a larger portion of profits over time, the stock should be able to grow into its earnings multiple.

This is a world-class business that has become an indispensable part of consumers' daily lives, and sometimes you don't need to overthink these types of investments.