Key Points
There are multiple reasons to buy Amazon (NASDAQ: AMZN) stock, but I think I’ve identified the single reason why Amazon is one of the best stocks to buy now. It all comes down to how rapidly its Amazon Web Services (AWS) division is growing, and the effect that it has on the overall business.
Most investors underestimate the effect AWS’ soaring growth has on the company, but I think it makes for a top reason why Amazon will crush the market over the next few years.
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AWS’ operating margin is a huge boost for Amazon
Most people think of Amazon’s e-commerce business when they think about the company. That makes sense, since that’s the most public-facing part of the business. But when you examine the financials, it’s really not that great of a business to be in. Commerce is a notoriously hard industry due to razor-thin margins.
Amazon’s North American commerce division generated $116 billion in revenue during the second quarter, but only produced $9.1 billion in operating income. That’s a 7.8% margin, which may be good for commerce, but it’s nothing compared to Amazon’s cloud computing division.
During Q2, AWS’ operating margin was an impressive 39%. So, for each dollar that comes in through each of these businesses, AWS makes about 5 times more profit. In fact, 60% of Amazon’s operating income came from AWS in Q2. AWS is clearly the most important part of its business, and with revenue growth rapidly accelerating, it looks like a phenomenal investment to make now.
In Q2, AWS’ revenue increased by 37% year over year. That’s likely to continue, as Amazon has poured hundreds of billions of dollars into building out new data centers for increased computing capacity. As those come online, expect AWS’ revenue to jump, bringing Amazon’s operating profits along with it. Because AWS is a smaller part of Amazon’s overall business, Amazon will grow its operating profits at a faster pace than revenue, making it a hidden way Amazon will outperform the market moving forward.
I think there’s a strong chance that Amazon will be one of the top-performing stocks over the next five years as more computing capacity comes online and AWS usage explodes higher. Now is the perfect time to scoop up shares, as most of the market is unaware of what’s coming down the pipeline for Amazon’s stock.
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Keithen Drury has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
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