The Best Blue Chip Stock to Buy After This Year's Market Pullback

The S&P 500 has declined 3% year to date amid inflation, a lack of interest rate cuts, intensifying conflicts across the Middle East, and other macro headwinds. Yet over the past five years, the S&P 500 has still rallied nearly 70% -- so it's really just a mild pullback.

Nevertheless, long-term investors should always view market pullbacks as opportunities to accumulate more shares of well-run blue chip companies. One such stock is Amazon (NASDAQ: AMZN), which has declined 10% year to date.

Image source: Getty Images.

Why did Amazon's stock underperform the S&P 500?

Amazon is the world's largest e-commerce and cloud infrastructure company. It's also becoming a major digital advertising platform through its promoted listings and integrated ads.

Amazon generates most of its revenue from its retail business, but most of its profits come from its cloud platform, Amazon Web Services (AWS). Amazon's higher-margin cloud revenues enable it to expand its retail business through lower-margin, loss-leading strategies. That unique combination widened its moat and helped it lock in over 240 million Prime members worldwide through exclusive discounts, free shipping, streaming media features, and other perks.

From 2025 to 2028, analysts expect Amazon's revenue and EPS to grow at CAGRs of 12% and 18%, respectively. Its retail business should continue to grow as it upgrades its logistics networks and expands into more countries. AWS will continue to profit from the secular expansion of its cloud infrastructure, data center, and artificial intelligence (AI) markets.

However, Amazon's plan to increase its capex from $131.8 billion in 2025 to $200 billion in 2026, mainly to expand its cloud and AI infrastructure, is driving the bulls out. That increased spending will further reduce its free cash flow (FCF) -- which already plummeted 69% in 2025 -- and reduce its FCF yield, which many investors use to value higher-growth companies. It could also compress its near-term operating margins.

Why is Amazon's stock worth buying right now?

While Amazon's stock looks reasonably valued at 27 times next year's earnings, it isn't cheap enough to attract bargain hunters as long as its FCF and margins remain under pressure. But if you expect Amazon's investments to pay off -- as they did in the past -- then it's still a good idea to accumulate more shares when growth-oriented investors shun its stock.

If Amazon matches analysts' estimates and trades at a more modest 25 times forward earnings by the start of 2028, its stock could rally more than 40% over the next two years. That would easily beat the S&P 500's average annual return of 10%.

Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.