Amazon Just Gave 4 Great Reasons to Buy Its Stock Hand Over Fist

Amazon (AMZN 6.19%) is on a roll. Shares of the e-commerce and cloud services giant have soared over 30% in 2024. This solid performance comes on top of an 80% gain last year. The company recently extended its streak of beating Wall Street’s earnings expectations with its third-quarter results reported on Thursday.

Perhaps the best news for investors, though, came in Amazon’s Q3 earnings conference call. The company just gave four great reasons to buy its stock hand over fist.

1. Focusing on growing free cash flow

What’s the single most important financial metric for a company? I think a strong argument can be made that it’s free cash flow. Earnings can sometimes be temporarily manipulated, but what you see is what you get with free cash flow.

Amazon reported free cash flow for the trailing 12 months ending Sept. 30 of $47.7 billion. This reflected a year-over-year increase of 123%. Free cash flow adjusted for equipment finance leases was $46.1 billion, up 128% year over year. That’s astounding growth.

CEO Andy Jassy said in the Q3 earnings call, “[W]hat we’re focused on primarily is free cash flow here.” That’s exactly what investors should love to hear from top executives. As free cash flow increases, so do share prices over the long term.

2. The AI business is growing faster than AWS

Amazon Web Services (AWS) remains the strongest growth driver for Amazon. AWS sales in Q3 jumped 19% year over year to $27.5 billion. The unit generated nearly 60% of Amazon’s total operating income.

There’s no more important tailwind for AWS right now than artificial intelligence (AI), especially generative AI. Jassy noted in the Q3 call, “It’s much harder to be successful and competitive in generative AI if your data is not in the cloud.”

Just how important is the generative AI opportunity for AWS? The unit has rolled out nearly twice as many generative AI and machine learning features as the other top cloud service providers combined.

Jassy said, “AWS’s AI business is a multibillion-dollar revenue run rate business that continues to grow at a triple-digit year-over-year percentage and is growing more than three times faster at this stage of its evolution as AWS itself grew.” He added, “And we felt like AWS grew pretty quickly.”

3. Massive e-commerce growth prospects over the next two decades

While AWS is Amazon’s superstar, we can’t overlook the company’s core e-commerce business. After all, e-commerce is still the biggest revenue source for Amazon. And it could present a bigger growth opportunity than you might think.

As Jassy explained in the Q3 call, Amazon currently has a market share of only 1% or so in the huge global retail market. He said that between 80% and 85% of retail sales are still made in brick-and-mortar stores. Jassy then delivered the kicker: “And so, if you believe that equation is going to flip in the next 10 to 20 years, which we do, there’s just a lot of opportunity, not just for us, but for several players.”

Amazon is working hard to capitalize on this major opportunity. The company is speeding up delivery times, improving operational efficiency, and offering more low-cost products. These efforts are paying off. In Q3, sales for Amazon’s stores business rose 9% year over year in North America and 12% internationally.

4. “Considerable upside” in the advertising business

Advertising is another important growth driver for Amazon. The company’s advertising revenue totaled $14.3 billion in Q3, up nearly 19% year over year. Jassy said, “While we’re generating a lot of advertising revenue today, there remains considerable upside.”

One way Amazon is increasing its advertising revenue is by improving the relevancy of the ads it shows to online shoppers. The company also just began its first season of Prime Video advertising.

Buy Amazon stock hand over fist?

Amazon isn’t just talking about delivering strong free cash flow growth; it’s delivering. There’s no denying the impressive growth of AWS, especially its AI business. Jassy’s right about the huge retail opportunity, even if e-commerce doesn’t expand as much as he thinks it will over the next two decades. He’s also almost certainly correct that Amazon will be able to significantly increase its advertising revenue.

Few companies boast the track record that Amazon does. Few offer as many great growth opportunities. So should you buy Amazon stock hand over fist? I think so.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keith Speights has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.