Putting anyone’s next $5,000 to work is a decision that should require some thought. Of course, investing involves putting one chunk of capital to work after another. But at a certain point, investors may find themselves “coming back to the well” so to speak with their stock ideas. The purpose of this piece is to try to highlight one particular individual stock I think can fit most long-term investor portfolios at some allocation.
When thinking about which companies a given individual wants to look at to begin with, identifying certain sectors or trends to invest in is the first place I think is worth starting. The company I’m going to highlight here has a solid presence in the cloud computing, digital advertising, and e-commerce sectors, with a business model that’s been driven by AI for much longer than it’s been the “cool” trend to invest in.
For those who haven’t figured it out yet, we’re talking about e-commerce giant Amazon (NASDAQ:AMZN | AMZN Price Prediction).
Let’s dive into why this top Magnificent 7 stock still looks like the best place to park some cash for the long-haul.
Starting with Solid Financials
A financial statement with a calculator and a stethoscope on a desk
In my view, investors looking at putting any amount of capital to work ($5,000 is just an example) need to assess the underlying health of the company they’re looking to invest in. For those expecting to hold their investment for an extended period of time, this up-front analysis is even more important.
Amazon’s most recent Q1 results highlighted the strength of its core business. Revenue surged 8.6% over the same quarter a year prior. And while that may not necessarily be the growth rate some investors are used to (given the sky-high revenue and earnings growth some AI companies are seeing right now), given Amazon’s size, this feat is truly incredible.
Perhaps more impressively, Amazon brought in non-GAAP net income which was more than 64% higher on a year-over-year basis. This drove EPS growth of more than 16%, double that of its top-line growth number. From these high-level numbers, all investors can (rightly) assume is that the company is expanding its margins and improving its operational efficiency, both of which would be true statements.
Let’s Dive Into Margins For A Minute
The word “cost” spelled out on wooden blocks with green arrows pointed downward
In Amazon’s case, being a mature tech company which is likely to see mid- to high-single-digit growth rates means that investors shouldn’t really expect the bulks of this company’s cash flow growth to come from the revenue line. Rather, Amazon has worked to become a more efficient giant, and this focus on operational efficiency has really paid off, when we look at the company’s most recent operating margin growth.
In the company’s first quarter, Amazon posted non-GAAP operating income of more than 20%, with its operating margin expanding to 11.8% from 10.7% in the same quarter the year prior.
That’s the kind of robust margin growth investors are looking for, particularly because this number flows right into free cash flow growth. Now, free cash flow is also a function of how much a given company spends on research and development, as well as other operating costs to build its moat. But with Amazon’s moat seemingly fully in place, this is a company that’s now appearing to turn its attention almost fully to bringing down costs and becoming the most efficient provider of AI-driven technology services to the public.
Valuation Matters
A person delivering Amazon boxes
From a valuation perspective, there’s also a lot to like about where Amazon currently sits relative to its Magnificent 7 peers. There are other companies in the mega-cap tech space which are cheaper. But on a valuation to growth basis, I’d argue Amazon’s current standing could be the best of the bunch.
On the company’s top and bottom line growth above (as well as its margins), the market has valued this tech giant at around 34-times. That’s a lot cheaper than most companies investors would consider to be “pure plays” on the AI trend. But it’s still relatively expensive, and highlights the implicit valuation premium that’s been embedded in this company for a long time.
For decades really, Amazon had no valuation multiples to speak of, since it took the company so long to maintain profitability. But now that Amazon has turned into the cash flow machine most investors expected to see in the early aughts, this is a company I think could have plenty of room to run from here.
Of course, Amazon’s growth rate would need to continue for some time (or accelerate). But with the rise of AI and the company’s internal efficiency prospects, this is a company I’d say is fairly valued given its prospects.
For those thinking long-term, this is a stock I’d certainly consider putting my next $5,000 to work in, particularly on any future dips.
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