If you have $1,000 that isn't needed to pay bills or bolster an emergency fund, you might consider putting it toward an investment that can help you grow that "grand" amount into something more. But which stock will give you the ultimate growth potential while also being a safe investment?
Sometimes the best stock to buy is one of the most well-known and successful companies in the world. At the beginning of 2023, the market sentiment had turned against Amazon (AMZN 0.56%). Its stock was trading for around $81, a far cry from its lofty high of $187 in the middle of 2021. Based on the market's reaction one might have thought Amazon's best days were behind it.
However, with the results it has posted over the past year, Amazon has once again positioned itself as a stock worthy of investors' capital. Significant financial improvements helped its stock price climb back up and it's trading for a price just shy of its 2021 high. Even better, its potential for future growth is as strong as ever.
Let's dig in and see what has made Amazon a great choice to buy right now.
The pandemic boom and its impact on Amazon
On one hand, Amazon benefited greatly from the pandemic-induced lockdowns in 2020 and 2021. With everyone stuck at home and access to stores limited, online retailers like Amazon experienced incredible demand for goods. For nearly two years, Amazon experienced quarterly year-over-year revenue growth above 20% as it met this demand. However, as revenue growth accelerated, so did Amazon's capital expenditures as it spent billions to increase its distribution footprint and keep up with expectations for timely delivery.
The impact of this spending was most clearly seen in Amazon's operating results. A comparison of the full-year operating income for Amazon's North America and international segments (which encompasses the e-commerce part of the business) makes clear the impact of the pandemic spending.
| Segment |
FY 2020 |
FY 2021 |
FY 2022 |
|---|---|---|---|
|
North America |
$8.7 billion |
$7.2 billion |
($2.8 billion) |
|
International |
$717 million |
($924 million) |
($7.5 billion) |
Data source: Amazon.
This level of detail is important to understand because Amazon's overall operating income never turned negative due to Amazon Web Services (AWS), which generated enough operating income to make up for the impact on the e-commerce side of the business.
A return to normal for Amazon
The story since the end of 2022 has been one of operational recovery. With the pandemic-induced demand in the rearview mirror, Amazon's management was left to try to get its house back in order. To put into perspective what Amazon had been through, it doubled its distribution footprint in two years. That level of spending in a short period would put any company into a state of financial stress. Fortunately for shareholders, Amazon has done a remarkable job of recovering.
| Segment | FY 2023 |
|---|---|
| North America | $15 billion |
| International | ($2.7 billion) |
Data source: Amazon.
Throughout 2023, Amazon's financial results steadily improved and by the end of 2023, North American operating income was $15 billion while international improved to a loss of $2.7 billion. Add to this AWS' operating income of $24 billion and overall operating income reached $37 billion, a 200% increase over 2022.
This operating income improvement also helped cash generation recover. Free cash flow for 2023 was $32 billion, compared to a free cash-flow-loss of $17 billion in 2022.
Why is Amazon a buy now?
Amazon stock was comparatively inexpensive at the end of 2022. As the calendar flipped over to 2023, Amazon traded for only 1.7 times sales. This was the cheapest the stock had been since 2015. Today, Amazon trades for 3.4 times sales and while that is a lot more expensive than it was, it's right in line with the historical average over the last 10 years. Amazon's revenue growth has returned to the double digits and given the recent bottom-line improvements, Amazon seems fairly priced today.
