At the end of last September, Warren Buffett's holding company Berkshire Hathaway controlled an even 10 million shares of Amazon (AMZN 3.43%). It isn't a top holding, but at a recent value of around $1.6 billion, it's more than just pocket change.
Buffett probably wishes he had acquired more shares of Amazon when it dipped in early 2023. The stock has soared about 75% from the low point it hit last March.
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Despite being way up already, analysts on Wall Street think it has more fuel in the tank. The consensus price target on Amazon suggests it can climb another 15% over the next 12 months.
Before rushing out to buy this or any stock based on encouraging estimates, there's something investors need to understand. The investment bank analysts who set attention-getting price targets can quietly adjust those targets downwards if things don't work out as hoped. Repairing the damage following a misguided estimate can cause to your portfolio's performance isn't so easy.
Here's a closer look at Amazon in light of recent developments to see if it's a smart stock to buy now.
Amazon swings back to profitability
Overinvestment during the early phase of the COVID-19 pandemic led to steep losses for Amazon in 2022. Long-term investors who confidently held the stock through the volatile period are being rewarded.
Wall Street analysts keep raising their price targets on Amazon because profits are back in a big way. Operations generated $36.8 billion in free cash flow last year, compared to an $11.6 billion outflow in 2022.
On the top line, Amazon was able to report total revenue that rose 12% year over year, thanks to double-digit percentage gains from all three of its operating segments.
Growth appears to be accelerating. Fourth-quarter sales rose 14% year over year, due in part to a record-breaking holiday shopping season.
Picks and shovels for the artificial intelligence (AI) gold rush
Amazon Web Services (AWS) is already the leading provider of cloud-computing services. The soaring popularity of generative artificial intelligence applications such as ChatGPT could make it even bigger in the years ahead.
The AWS segment is less cyclical than Amazon's e-commerce operation and a lot more profitable. AWS contributed just 14% of total sales in the fourth quarter, but it was responsible for 55% of total operating income.
Amazon is positioning AWS to be a leading service provider for businesses of any description that want to develop, market, or employ power-hungry AI applications. To keep ahead of the competition, AWS will be the first to offer access to Nvidia's GH200 Grace Hopper Superchips.
AWS clients who insist on access to pricey Nvidia chips that most developers of AI applications are already familiar with have that option. The company is also positioning itself to serve cost-conscious businesses that don't necessarily need access to Nvidia's chips. Amazon's proprietary Trainium2 chips are designed to run up to four times faster than the previous version.
An unbeatable e-commerce platform
In the early days of the COVID-19 pandemic, Amazon spent heavily to upgrade and expand its logistics network. Those investments make Amazon an indispensable partner, largely because consumers are already used to ultra-fast shipping that none of its competitors can match.
In 2023, the company delivered more than 7 billion packages with same-day or next-day service. Amazon now operates more than 55 dedicated same-day sites across the U.S. that are ramping up fast. The number of items shipped through same-day sites rose 65% year over year in the fourth quarter.
Free and fast shipping isn't the only feature that makes $14.99-per-month Amazon Prime memberships hard to let go of. For example, Prime members can now access primary care services from One Medical for an additional $9 per month.
A buy now?
Amazon isn't a bad stock to buy right now, but it might be riskier than you anticipate. Following a big run-up, its shares are trading for more than 47 times forward-looking earnings estimates.
Amazon has what it takes to overcome its high valuation and deliver market-beating gains over the long run. That said, there are no guarantees. If earnings don't rise sharply throughout 2024, the bottom could fall out from under this stock and lead to swift losses. If you don't have a high tolerance for risk, it's probably best to wait for a more attractive price.
