Warren Buffett’s holding company, Berkshire Hathaway, holds ten million shares of Amazon (NASDAQ: AMZN), valued at around $1.6 billion. Despite not being a top holding, the stock has risen about 75% from its low point in March, a meteoric climb that has investors and analysts buzzing.
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Wall Street analysts are bullish on Amazon, predicting another potential 15% climb over the next 12 months. However, as encouraging as these estimates may seem, investors should be wary of the inherent uncertainty.
Amazon swings back to profitability
In 2022, Amazon suffered steep losses due to overinvestment in the early phase of the COVID-19 pandemic. However, long-term investors who weathered the storm are now reaping the rewards as the tech giant returns to profitability.
Analysts are raising their price targets on Amazon as profits rebound. The company reported $36.8 billion in free cash flow in 2023, a stark contrast to the $11.6 billion outflow in the previous year. With a 12% year-over-year rise in total revenue and accelerating growth, the company is charting a promising course.
Picks and shovels for the artificial intelligence (AI) gold rush
Amazon Web Services (AWS), the leading provider of cloud-computing services, is poised to capitalize on the growing popularity of generative artificial intelligence applications such as ChatGPT. With AWS contributing 55% of total operating income despite accounting for only 14% of total sales, the segment’s profitability is a substantial asset.
Furthermore, Amazon’s innovation continues as it positions AWS to be a key player in the AI market. The company’s strategic moves to offer access to advanced Nvidia chips, coupled with the development of its proprietary Trainium2 chips, demonstrate its commitment to staying ahead in the AI race.
An unbeatable e-commerce platform
Amid the COVID-19 pandemic, Amazon invested heavily in upgrading and expanding its logistics network. The company’s dedication to providing top-tier services, including same-day or next-day shipping, has solidified its position as an indispensable partner for consumers.
In 2023, Amazon delivered over 7 billion packages with same-day or next-day service, operating more than 55 dedicated same-day sites across the U.S. Additionally, Amazon Prime memberships offer exclusive perks such as access to primary care services, further bolstering the platform’s appeal.
Is Amazon a buy now?
While Amazon presents an enticing investment opportunity, its current valuation, trading at over 47 times forward-looking earnings estimates, poses a level of risk. The potential for substantial gains over the long run exists, but the absence of guarantees requires cautious consideration.
Investors should weigh their risk tolerance carefully and evaluate whether the current price aligns with their investment strategy. It’s essential to remain level-headed and avoid making impulsive decisions based solely on short-term market sentiment.
*Stock Advisor returns as of January 29, 2024