Sometimes investing into stocks is simple. Find the best ones and buy shares whenever the market turns negative against them. It can be counterintuitive. How can stocks with the best historical performance still give great returns? But it’s true. Winners do keep winning.
Take Amazon.com as one example. The stock has brought in 167,900% since its IPO and 1,530% just in the previous ten years — after many said its best days were gone. Despite these gains being in the past, I just bought more shares. Here is why.
Changing of leadership
Amazon’s new CEO, Andy Jassy, is said to be more even-keeled than Bezos. His focus to detail is truly unique. He joined Amazon after graduating from Harvard Business School and has helped Amazon Web Services (AWS) grow since the cloud computing group was created in 2003. He has grown it into more than half of the firm’s operating profit. AWS has given $52.7 billion in revenue over the previous 12 months. That would make it the 61st largest firm by sales in the country if it were a stand-alone company.
Amazon has created an expertise in operating its huge computer infrastructure thanks to its retail operations and created AWS as a way to give that expertise to other companies.
What used to take large investment in servers, staff and real estate can now be rented from Amazon by the minute. The company provides over 200 services to companies all over the world.
The company unit continues to expand. It is opening new areas to increase their availability of the AWS services across the world. In fact, it is not only growing, it is accelerating. AWS revenue has increased faster in each of the previous two quarters. That performance, and what it might mean in the long term, is one of my top reasons for buying more shares.
A fair valuation
Amazon stock is rarely cheap. It has traded under 24 times operating cash flow only during times of panic. And those cannot be predicted.
After its Q2 earnings were released, the stock has gone down almost 9%. The company’s quarterly sales and forecast also fell short of projections. Currently, the estimate from analysts is for $490.3 billion in revenue for the entire year. Despite the last quarter’s hiccup, the previous few years can be used to project the rate of operating cash flow.
Using the pre-pandemic 13.7% in 2019 as our guide, the stock’s $1.67 trillion market cap is around 24.8 times normalized operating cash flow for this year. That would be level with historically good times to purchase shares. And this is just one more reason I was glad to buy more shares of Amazon.
Author: Blake Ambrose