3 Reasons Amazon Is the Best Growth Stock to Buy in May
Key Points
Amazon's high-margin AWS business now accounts for more than half of its total operating income.
Successful with its AI chips internally for years, Amazon is starting to open up to the possibility of selling its hardware solutions.
With a year-ahead multiple in the high 20s, Amazon isn't cheap. It's also not expensive.
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Despite being just a few upticks away from topping $3 trillion in market cap for the first time, Amazon (NASDAQ: AMZN) still has a long runway for growth. The company that started out three decades ago billing itself as Earth's Biggest Bookstore has somehow overachieved with that goal.
Amazon is a consumer, tech, and consumer tech company. There's a good chance you've been a recent customer. But let's not get ahead of ourselves. I'm going to give you three reasons Amazon could be the best growth stock to buy this month.
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1. AWS isn't moving the needle; it is the needle
Net sales rose 17% in Amazon's latest quarter. That's not a lot, but it is the e-commerce bellwether's strongest top-line jump in more than four years. The driver pushing hard on the accelerator is Amazon Web Services (AWS), the cloud hosting platform whose net sales climbed 28%, the segment's strongest move in more than three years.
Most people consider Amazon's primary business to be e-commerce, but check out AWS. It contributes just a fifth of the company's revenue, but unlike the weak markups Amazon gets in online retail, the web services business consistently generates an operating margin above 35%. More than half of Amazon's overall operating profit is the handiwork of AWS.
2. Chips ahoy
Amazon took a hit earlier this year, when it announced it would earmark $200 billion in capital expenditures to build out its AI capabilities. Now, the market's starting to get it. AWS is the top dog among hyperscalers, commanding almost a third of the global market.
The leading AI platforms are leaning harder on Amazon, and it's making sure it's not at the mercy of others on the hardware end by creating its own AI chips. CEO Andy Jassy said last month that Amazon may eventually start selling its energy-efficient AI chips to customers. And that's starting to happen. Social media giant Meta Platforms (NASDAQ: META) announced plans to deploy Amazon's Graviton chips to round out its AI efforts. Don't be surprised if more big-ticket and model-affirming deals are announced.
3. Amazon is cheaper than you think
Amazon stock has risen 31% over the past year, just ahead of the general market. It's up just 66% over the past five years, a bit behind the S&P 500. Meanwhile, revenue has nearly doubled over the past year, and its operating and net profits have more than quadrupled. As you can probably imagine when a stock's fundamentals are running circles around its stock activity, Amazon isn't as expensive as you might think.
You can buy Amazon for 31 times this year's adjusted earnings and 27 times next year's target. These aren't bargain-basement multiples, but they're more than reasonable for a business that's transforming into a higher-margin sum of its parts.
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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Meta Platforms. The Motley Fool has a disclosure policy.
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