After plunging in the face of economic challenges, Amazon (AMZN 0.62%) stock has enjoyed a robust rebound, fueled by the improving economic landscape and the ongoing recovery among technology stocks. Shares of the online retail pioneer were up a remarkable 81% in 2023, more than triple the 24% gains of the Nasdaq Composite.
The green shoots of a broader economic recovery and better-than-expected results have long-term investors breathing a sigh of relief that the worst may finally be over. However, the stock's performance last year raises the quintessential investing question: With gains of that magnitude, is it simply too late to buy Amazon stock, or are there reasons to expect there's more to come?
I would submit that there are 100 billion additional reasons to buy Amazon stock.
Image source: Getty Images.
You have to spend money to make money
Over the past few years, Amazon has been investing heavily in its infrastructure, despite the headwinds that buffeted the broader economy.
One of the company's most ambitious e-commerce goals -- announced back in 2019 -- was to reduce the time needed to deliver most products to Prime customers from two days to one. This required a massive investment in its fulfillment and logistics network. At the time, CFO Brian Olsavsky said, "It will take us a significant amount of time to achieve."
These expenditures ramped up dramatically over the past few years, weighing heavily on Amazon's free cash flow:
| Metric |
2019 |
2020 |
2021 |
2022 |
|---|---|---|---|---|
|
Capital expenditures |
$24.3 billion |
$59.6 billion |
$58.2 billion |
$37.6 billion |
|
Free cash flow |
$25.8 billion |
$31 billion |
($9.1 billion) |
($11.6 billion) |
Data source: Amazon. Table by author.
As a reminder, free cash flow is what's left after capital expenditures, or capex, are deducted from operating cash flow, so the two will move in opposite directions. Higher capex spending will reduce free cash flow, while lower capex spending will increase free cash flow.
It's also worth noting that Amazon's free cash flow soared nearly tenfold from $1.9 billion in 2014 to $19 billion in 2018. This point helps illustrate just how quickly the company will be able to ramp up its cash flow generation once its current infrastructure spending spree comes to an end.
Multiple drivers
Despite Amazon's robust performance last year, there are catalysts that could propel the stock higher in 2024.
The headwinds of the past couple of years are abating, which could lead to increasing revenue growth for Amazon. For the first nine months of 2023, Amazon grew revenue by 11% year over year, up from 9% growth for 2022, and many on Wall Street expect that trend to continue.
One example is J.P. Morgan analyst Doug Anmuth, who named Amazon a "top pick" for 2024, calling for revenue growth to accelerate to 13% in 2024, driven by the company's two largest business segments. Amazon Web Services, the company's cloud business, is expected to generate growth of 17%, up from 13%, driven by growing demand for artificial intelligence (AI). At the same time, its e-commerce operation is expected to grow revenue by 11%, up from 9%. This is also expected to push the bottom line higher, with its operating profit margin climbing to nearly 8%, up two percentage points.
In addition, Amazon's heavy infrastructure spending is expected to slow in 2024. The combination of lower spending and growing revenue is expected to juice Amazon's free cash flow from $38 billion in 2023 to $53 billion in 2024 and $74 billion by 2025, according to Anmuth. This trajectory suggests that Amazon's free cash flow could be north of $100 billion within just three years.
That would put Amazon in very elite company, joining the likes of Microsoft, Alphabet, and Apple, which generated cash flow of between $59 billion and $100 billion during the first nine months of 2023.
Why it matters
Free cash flow is generally regarded as one of the most important gauges of a company's financial health -- but it should never be viewed in a vacuum. As shown over the past couple of years, heavy infrastructure spending to gain a competitive advantage can skew the results to the downside -- at least temporarily.
Experts generally agree, however, that free cash flow provides businesses with the greatest degree of financial flexibility to respond to an ever-changing business environment.
One of the most common uses of free cash flow, outside of capital expenditures to fuel additional growth, is funding a dividend. Thus far, Amazon hasn't given any indication that it plans to start a payout. That said, given the growing history of dividends by its big tech brethren -- including Apple, Microsoft, and even Nvidia -- it's probably just a matter of time before Amazon joins the fray.
Since the company is on track to generate as much as $100 billion in free cash flow over the next few years, Amazon will have plenty of resources to tap when it does eventually decide to return capital to shareholders.
