Amazon (AMZN -0.07%) has created a lot of wealth for investors since becoming a public company in 1997. The company sold shares in its initial public offering (IPO) at 7.5 cents a share after adjusting for stock splits, and closed the first day at $0.09. The stock ended above $220 on July 1.
However, these outsize gains don’t mean you should pass on the stock today. After all, Amazon has been highly successful. The key questions become the company’s future prospects and whether it can continue growing profitability at a high rate.
Fortunately, Amazon has evolved since its early days as an online bookseller. Presently, its business looks well positioned to take advantage of major trends. Here are three reasons why investors should purchase Amazon shares.
Image source: Getty Images.
1. The cloud
Amazon has become known for many things. Many people think about it as an online seller of a wide variety of goods at low prices, its Prime subscription services, physical stores like Whole Foods, and devices like Alexa. These produce most of Amazon’s sales.
However, the majority of the company’s profits come from Amazon Web Services (AWS). That’s Amazon’s cloud computing business. While the business was 19% of the company’s first-quarter sales, it represented 63% of operating income.
AWS’ many large data centers around the world provide organizations (e.g., private companies and governments) a cloud-computing platform to allow them to do things like store and manipulate data. With a clamoring for data, the market continues to grow rapidly. Cloud infrastructure services spending increased 23% year over year in the first quarter to $94 billion.
Since these data centers require a lot of resources, size confers a large competitive advantage. AWS has the leading market share, 29% in the first quarter, according to CRN. Microsoft Azure and Alphabet‘s Google Cloud follow with 22% and 12% shares, respectively.
AWS’ sales and profits continue to grow at a fast rate. The division’s first-quarter sales increased 17% to $29.3 billion, and operating income rose 22.6% to $11.5 billion.
2. Investing in the future
Generating large profits translates into tremendous cash-flow generation. Its free cash flow (operating cash flow less net capital expenditures) was $25.9 billion for the 12 months that ended on March 31.
After spending $63.6 billion on capital expenditures last year, management is on pace to spend $100 billion this year. Most of the spending has been on technology infrastructure to support AWS’ growth.
Growth initiatives include investments in data centers related to generative artificial intelligence and cloud computing that will help grow the AWS business. Technology should also help Amazon’s other businesses, such as fulfilling online orders more efficiently. This allows Amazon to stay a step ahead of the competition.
3. Better valuation
Amazon’s shares have taken a breather. At the time of this writing, the stock price is up 1.8% this year through July, lagging the S&P 500 index’s climb of 6.8%.
While it’s hard to call Amazon’s stock a bargain, this year’s price movement has resulted in a better stock valuation. The shares have a price-to-earnings (P/E) ratio of 36, down from 40 at the end of 2024. It’s richer than the S&P 500’s 30 P/E, but this looks justified given Amazon’s high sales growth prospects, including management’s expected 7% to 11% in the second quarter.
With a market-leading AWS business that should continue growing at a nice pace as organizations clamor for its cloud-computing solutions, management investing to maintain its market lead, and a better valuation, long-term shareholders should view Amazon’s stock as a buying opportunity.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
