You only need a few ingredients for a game-changing retirement investment. The business should be exposed to large, attractive growth avenues in industries that can expand for decades. This company needs a dominant market position in a few of these areas and should also have a good track record on profitability and cash flow.
At this point, you simply need to hold the stock for many years and watch as these positive factors amplify your returns.
Amazon's (AMZN +0.64%) business features some of these factors in spades, while others are a bit lacking right now. Let's take a closer look at the potential for this stock to power fantastic returns for investors seeking a huge retirement portfolio.
The latest results
Amazon's last earnings update illustrated some massive competitive strengths. The e-commerce industry was under pressure as demand tilted back toward in-person retailing, but the company still managed a modest uptick in product sales, to $57 billion.
NASDAQ: AMZN
Key Data Points
Yet investors are more excited about the services business that includes Amazon's web services segment. An additional $10 billion of revenue in that segment allowed overall sales to rise 9% for the selling period that ran through late March. Management in late April credited several successful initiatives including its new advertising business aimed at helping sellers market their products. "There's a lot to like about how our teams are delivering for customers," CEO Andy Jassy said in a press release.
Cash and profits
The company swung to a significant profit in Q1 as net earnings landed at $3.2 billion compared to a loss of nearly $4 billion a year ago. This improvement was partly powered by new cost cuts, but Amazon's earnings are volatile due to its intense capital spending requirements.
MSFT Cash from Operations (TTM) data by YCharts.
Investors should follow cash flow for a better view of the businesses' financial strength. And there's no reason for concern on this point. Operating cash flow is up a blazing 38% over the past year, to $54 billion.
Success here allows Amazon to invest aggressively in growth opportunities like its services business, AI innovations, and the delivery network. It also frees up resources that the company can direct toward stock buybacks and an eventual dividend payment.
The price is high
The biggest risk for investors is in overpaying for such a successful business. That risk has risen this year, to be sure. You'll have to pay 2.5 times annual sales for the stock right now, up from a price-to-sales ratio of about 1.7 in early 2023. Shares are up over 50% year to date.
Sure, other tech giants are much more expensive. Microsoft is valued at 12 times sales, for example. Meta Platforms is priced at over 6 times sales.
With an Amazon investment, you get some of the benefits that these companies are targeting over the next few decades in areas like digital entertainment, consumer tech devices, and enterprise cloud services.
But in exchange for a weaker profit margin (roughly 3% today), the stock valuation is much lower. That's a potentially attractive trade-off for investors with long time horizons. Amazon could be generating far higher annual earnings a few decades from now, likely driving great returns for your retirement portfolio.
