Warren Buffett’s Berkshire Hathaway held 10 million shares of Amazon at the end of last September–a figure valued at around $1.6 billion. While not the company’s top holding, this stake is certainly more significant than mere pocket change. Despite fluctuations, the stock has surged approximately 75% from its low point in March of last year.
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Analysts on Wall Street are now predicting a further 15% climb for Amazon’s stock over the next 12 months, holding the consensus price target.
However, before avidly following these predictions, investors should be mindful. While investment bank analysts can set attention-grabbing price targets, they can just as quietly adjust these targets downward if their expectations do not materialize.
The recent financial performance of Amazon merits a closer look in assessing its potential as a wise investment.
Amazon’s Return to Profitability
Amazon incurred steep losses in 2022 due to overinvestment during the early phase of the COVID-19 pandemic. However, long-term investors who remained steadfast are now reaping significant rewards.
Wall Street analysts are consistently raising their price targets for Amazon as the company’s profits have staged a remarkable return. The company’s operations generated $36.8 billion in free cash flow last year, a stark contrast to the $11.6 billion outflow in 2022.
On the revenue front, Amazon reported a 12% year-over-year increase, driven by double-digit percentage gains across all three of its operating segments. The fourth-quarter sales surged by 14% year over year, buoyed in part by a record-breaking holiday shopping season.
Paving the Way for the Artificial Intelligence (AI) Gold Rush
Amazon Web Services (AWS) has firmly established itself as the leading provider of cloud-computing services. Moreover, the burgeoning popularity of generative artificial intelligence applications, such as ChatGPT, positions AWS for further growth in the years to come.
While AWS contributes just 14% of total sales, it accounts for a significant 55% of total operating income, making it less cyclical and considerably more profitable than Amazon’s e-commerce operation.
Amazon is strategically positioning AWS to cater to businesses of all sizes seeking to develop, market, or utilize resource-intensive AI applications. In a bid to stay ahead of the competition, AWS will be the first to offer access to Nvidia’s GH200 Grace Hopper Superchips.
Clients of AWS have the option to access Nvidia chips, and Amazon is also targeting cost-conscious businesses by offering its proprietary Trainium2 chips, designed to operate up to four times faster than their predecessors.
Unparalleled E-commerce Dominance
During the early days of the COVID-19 outbreak, Amazon made substantial investments in upgrading and expanding its logistics network. Consequently, the company’s ultra-fast shipping options have made it an indispensable partner, distinguishing it from its competitors.
In 2023, Amazon delivered more than 7 billion packages with same-day or next-day service, and it now operates over 55 dedicated same-day sites across the U.S. The volume of items shipped via these same-day sites surged by 65% year over year in the fourth quarter.
In addition to free and rapid shipping, the $14.99-per-month Amazon Prime membership offers numerous benefits, such as access to primary care services from One Medical for an extra $9 per month.
Should You Invest Now?
While Amazon’s stock may seem attractive at present, its current valuation is high, trading at more than 47 times forward-looking earnings estimates. It has the potential to overcome this high valuation and deliver significant returns in the long term; however, this is not guaranteed.
Should the company’s earnings fail to see substantial growth throughout 2024, the stock could plummet, leading to swift losses. Those averse to high-risk investments may find it prudent to await a more opportune price.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Cory Renauer has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, and Nvidia. The Motley Fool has a disclosure policy.
