Investors received plenty of good news in Amazon's (AMZN 3.43%) recent earnings update. The tech giant revealed strong Q4 growth in both its e-commerce segment and in the services division that's quickly becoming the dominant part of its business. Wall Street reacted by pushing the stock up over 10% so far in 2024 following Amazon's market-thumping rally last year.
Amazon's growth is accelerating across the board even as expenses are dropping. Those are excellent reasons to consider buying the stock right now. Yet there's even better news regarding Amazon's cash flow.
Let's dive right in.
The growth wins
Growth is a key pillar of the bullish investment thesis, and there's good reason to be excited about Amazon's progress here. The post-pandemic e-commerce sales lull appears to be over, for one. This past quarter's 9% boost in product sales translated into a record holiday shopping season, management said in early February. The company delivered products more quickly and at a lower average cost, too, which is great news for both customer loyalty and profitability.
There's a significant rebound in the works in cloud services following weakening growth trends in early 2023. Enterprises are back to migrating more of their work processes onto Amazon Web Services, management said in a conference call with investors. That means this business, which accounted for 55% of sales this past year, is likely to continue growing in importance to Amazon's wider revenue ambitions. Services sales accelerated to a 13% increase last quarter from 12% in fiscal Q3.
$37 billion in cash flow
Investors should be even more optimistic about free cash flow trends. Cash flow is a great predictor of earnings power, after all, and it is more informative than simply following bottom-line profits, which can swing wildly from quarter to quarter.
AMZN Free Cash Flow data by YCharts
The news is unambiguously positive here. Amazon's free cash flow soared to $37 billion in the past year compared to a $12 billion outflow in fiscal 2022. This boost means the company has the flexibility to invest in growth areas like generative artificial intelligence (AI) and data centers, as well as a more robust delivery network.
Yet executives are also allowing more of that cash flow to support rising profitability. Operating profit margin is racing back toward its pandemic high of about 7% of sales. There's a good chance that this figure will cross 10% in the coming years as the company tilts further toward those high-margin services sales.
Looking ahead
Most Wall Street pros are looking for sales to rise at about the same 12% rate that shareholders saw in 2023. Earnings will jump to $4 per share from $2.90 per share this past year, they estimate.
In that context, investors should consider the stock a good deal even following its recent rally. Shares are priced at 3 times sales, or about halfway between the pandemic highs in mid-2020 and the post-pandemic low set in late 2022.
The biggest knock against Amazon's business as compared to other elite tech stocks is that its profit margins aren't magnificent. Apple books over 30% of its revenue as operating profit, and Microsoft converts more than 44% of sales into operating profit. If Amazon can keep closing the gap with these rivals, shareholders should be rewarded with more gains ahead. Keep an eye on cash flow trends for confirmation that the business remains on that positive track.
