5 reasons to buy Amazon shares like there's no tomorrow

Of the Magnificent Seven stocks, you might be surprised to know this Amazon (NASDAQ:AMZN) has actually produced the lowest returns over the past five years.

AMZN data from YCharts

That's pretty strange, especially since the Covid-19 pandemic highlighted how important Amazon's e-commerce and cloud franchises are to consumers and businesses alike.

This is because the post-pandemic period reversed many of the positive trends Amazon experienced during the stay-at-home period. Add to that the retirement of founder Jeff Bezos, and it's a recipe for shareholder skepticism.

However, practically all Amazon companies now have better key figures and further positive developments are emerging. Here are five good reasons to buy Amazon shares today.

1. AWS is picking up speed again

Last quarter, Amazon Web Services (AWS) revenue growth accelerated to 19% for the third consecutive quarter, while operating margins increased with this growth to a very healthy 35.5%, compared to just 24.2% in the year-ago quarter.

AWS isn't growing quite as fast as its competitors, but that's due to the law of large numbers as the largest cloud in the space. But with over $100 billion in revenue, a 19% growth rate is truly impressive.

While some thought Amazon had fallen behind its competitors in the artificial intelligence space, AWS' renewed acceleration and new product announcements suggest this is not the case. While Rival Microsoft Amazon has an exclusive relationship with early leader OpenAI and has invested in Anthropic, the company behind the impressive Claude Large Language Models (LLMs) and led by OpenAI's old head of research. Additionally, AWS is committed to the broadest range of generative AI options with its Bedrock platform.

It's entirely possible that LLMs will become somewhat standard over time, but Amazon has always been great at acquiring competitive companies and becoming a scaled, low-cost provider. In this sense, Amazon had the foresight to invest early on in its own, self-developed chips since 2015. Amazon's in-house CPU processors called Graviton significantly reduce costs compared to x86 merchant solutions.

But the cost difference compared to third-party providers will be even more important in the age of AI as training continues to advance Nvidia Chips are extremely expensive. Back in July, an Amazon manager noted that the in-house AI chips Trainium and Inferentia were 40 to 50% cheaper than Nvidia's in terms of price-performance ratio. Given Amazon's broad reach and early investments in low-cost chips, AWS should be quite competitive in the AI ​​era.

2. E-commerce is becoming more and more efficient

Since last year, CEO Andy Jassy's plan to make Amazon's e-commerce business more profitable has been a resounding success. Both North American and international operating margins have increased quarterly since the fourth quarter of 2022, thanks to Jassy's implementation of a regional system that has reduced Amazon's package delivery costs. Since the third quarter of 2022, paid units delivered have exceeded shipping cost growth in each quarter.

Investors have always been somewhat skeptical that Amazon's e-commerce operations will ever be profitable, but both its North American and international segments are now profitable and are seeing steadily increasing margins.

3. Advertising growth will continue

One of the biggest bright spots for Amazon in recent years has been the growth of its advertising business, which includes its retail site and Prime Video. With annual growth of around 20% and an annual run rate of $50 billion, Amazon's ad business is now a serious digital advertising player behind search, Facebook and Instagram.

But advertising is likely to maintain strong growth as Amazon is able to link its troves of customer data to better target ads to customers who are more likely to make a purchase. In addition, the segment still offers untapped opportunities. Prime Video doesn't even advertise in several major international markets yet, but Amazon now plans to launch digital video ads in India, Brazil, Japan, New Zealand and the Netherlands in 2025, which should help drive growth.

As long as customers continue to flock to Amazon's online stores and sign up for Prime, which is likely, high-margin ads will follow.

Image source: Getty Images.

4. New ventures

Just because Amazon is becoming more profitable doesn't mean the company isn't investing in new growth areas. These include expansion into grocery stores, healthcare and perhaps the most exciting project, Kuiper, Amazon's fledgling satellite broadband offering.

The Kuiper project is intended to compete with SpaceX's Starlink business. While the cost of launching satellites into orbit is high, with some estimates suggesting the initial cost will cost Amazon around $20 billion, these high entry costs block too much competition. Meanwhile, analysts estimate that Kuiper, if successful, could bring Amazon profits in the tens of billions of dollars annually.

According to the company, Kuiper broadband services will be available sometime next year. This could be another catalyst for the stock in 2025.

5. Further cost reductions are planned

In addition to these positive growth prospects, CEO Andy Jassy announced last month that Amazon will launch an efficiency initiative by the end of this year. Jassy and his team now want to get rid of layers of middle management by increasing the ratio of individuals to managers by 15%. Additionally, Jassy is asking his employees to return to the office five days a week, having seen the benefits over the past 15 months when employees were called back to the office at least three days a week.

The two initiatives appear to be linked, as those who do not want to work five days a week may quit, thereby helping management in its cost-cutting decisions. If the initiative helps increase Amazon's efficiency, as Jassy's previous e-commerce efficiency initiatives have done, shareholders should look forward to even more profitable growth.

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