What I love most about investing (besides making money, of course) is its dynamic nature. The market is ever-changing, and investors always have something to debate. Just a few months ago, the talk was all about a possible recession (and there is still a chance we will see one). These days, the conversation is all about the incredible possibilities in tech brought on by artificial intelligence (AI) and machine learning (ML).
Nvidia floored the market with its first-quarter earnings release and crazy-good guidance. The stock is now up 189% so far this year and nearly 615% over five years. It also trades near its higher price-to-earnings (P/E) and price-to-sales (P/S) ratios ever, at 220 and 41, respectively. The company has a tremendous future, but now may not be the best time to buy because of its high valuation.
While you're waiting for a pullback, many other compelling AI/ML opportunities exist, and Amazon (AMZN 0.80%) is a terrific candidate. AI permeates Amazon's business, from logistics efficiencies to digital advertising to product placement. Amazon is also the world's largest cloud services provider with Amazon Web Services (AWS). Massive data powering AI for companies runs on AWS. Amazon Bedrock is another AI initiative that allows companies to customize existing AI/ML models for their needs. And, of course, it runs on AWS.
Amazon is investing for the future, big-time
By now, you are probably aware that the pandemic-related boost for Amazon (stimulus dollars and a push to online shopping) boomeranged into a nightmare of increased labor costs, logistical snags, inflation, and a potential recession. The result is losses in the North America and international segments and slowing growth in the Amazon Web Services (AWS) segment. But CEO Andy Jassy isn't focused on short-term fixes.
He knows the headwinds will pass and the company is gearing up for what's next. Amazon quietly ramped up investments in capital assets, or capital expenditures, over the last few years. Capital assets are things like buildings and machinery that a company uses to produce revenue. In Amazon's case, capex also includes expanding AWS' capacity with servers and other technology assets and equipment.
As shown below, Amazon has ramped up capital expenditure spending significantly since 2019.
Data source: Amazon. Chart by author.
Amazon has spent over $180 billion on capex since 2019, with much of it geared toward technology. With the AI boom here, this investment in the future should pay off big time.
Amazon's turnaround is here
Amazon surprised a lot of folks in Q1 with impressive 9% sales growth reaching $127 billion. The North American segment also returned to operating profitability, which was great, although international profits are still elusive. But, perhaps the best way to illustrate the turnaround is to look at the operating cash flow depicted below.
AMZN Cash from Operations (TTM) data by YCharts
Amazon's cash from operations peaked in 2021 and bottomed in the middle of last year. It has been on the upswing ever since. Cash flow is a terrific leading indicator showing that Amazon's recovery is real.
Is now a good time to buy Amazon stock?
In many ways, Amazon stock's position is the opposite of Nvidia's. While the stock is up quite a bit year to date, it is only up 19.7% over the last year (less than the Nasdaq Composite) and is actually down 2.8% over three years. Amazon is more than 30% off its all-time high, while Nvidia is near its highest price.
The valuation of Amazon stock is also down. P/E is not a good metric at this point because profits are just starting to return, but the P/S ratio tells the tale. At 2.5, the stock would need to rise 40% to reach the five-year average of 3.5, as shown below.
AMZN PS Ratio data by YCharts
Amazon may not be the first stock to come to mind when discussing AI. But with AI and ML deeply embedded in its operations, maybe it should be. The company's commitment to the future, the turnaround in progress, and the stock's undervaluation make Amazon an excellent investment.
