Forget Amazon Prime Days: Here's the Real Reason to Buy the Stock
Key Points
Amazon Web Services is the best reason to buy the stock.
Amazon is investing heavily in this division.
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Amazon (NASDAQ: AMZN) Prime Days is happening, and the results of the big sales event could drive more attention to the stock. While Amazon's commerce business is the most consumer-facing, I don't think it's the best reason to buy the stock. Instead, I think Amazon Web Services (AWS) is a better reason.
AWS is the real reason Amazon is now highly profitable, and with its superior growth rate, I think it's by far the top reason to buy the stock right now.
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AWS is small, but mighty
In Q1, AWS accounted for only 21% of Amazon's total revenue, generating about $37.6 billion. However, this figure is dwarfed by its commerce divisions, which generated $39.8 billion in international revenue and $104 billion in North American revenue. That's a huge difference, but revenue isn't everything.
Commerce and cloud computing have two entirely different margin profiles, and despite AWS's small size, it actually accounted for 59% of Amazon's operating profits in Q1. That's not a one-time anomaly that occurred in Q1; this trend persists throughout the year.
With AWS generating the majority of Amazon's profits, it steers the company's direction. Furthermore, AWS is growing substantially faster than its commerce businesses, too. In Q1, North America commerce grew 12% year over year while international sales rose 19%. AWS rose at a 28% rate. When the most profitable segment is also the fastest-growing, that bodes well for the company, and is a big reason why Amazon's profits are growing faster than its revenue.
This pattern is likely to continue, as Amazon is investing a jaw-dropping $200 billion in data center capital expenditures this year to meet demand for AI workloads. That kind of spending needs to result in solid, long-term growth, and Amazon's CEO Andy Jassy has already told investors that customers are lined up to use the majority of this newly built computing power once it's online. That's great news for investors, and with Amazon's custom chips driving triple-digit revenue growth in that segment, the company has a lot of positives in its AWS division.
To top things off, Amazon's stock currently looks like a bit of a Prime Day deal itself.
AMZN Price to CFO Per Share (TTM) data by YCharts
Amazon's stock is seldom this cheap from a cash flow perspective, and with the stock down about 15% from its all-time high, now is the perfect time to buy some shares.
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Keithen Drury has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
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