Amazon (NASDAQ: AMZN) has been one of the best-performing stocks in the market, no matter which timeframe you look at. It has risen 47% over the past year, 115% in the last five years, and 1,060% in the past decade -- easily outperforming the market (measured by the S&P 500 ) over that timeframe. But none of that matters now, as you can't travel back in time to invest in Amazon earlier.
All that remains is the future, and determining whether a stock can beat the market moving forward is a tricky proposition. However, I've come up with five reasons why Amazon can, making it an intriguing investment opportunity.
1. Improving commerce margins
When you think of Amazon, the first thing that comes to mind is its online store, which has nearly anything you can think of. However, Amazon is a much broader business. Whether it's cloud computing, advertising, or fulfillment, Amazon is an incredibly complex company involved in many areas.
Despite the rise of other areas, its commerce business is still the largest part of its business. This is a fairly mature segment, so improving margins is a must. Amazon has been doing just that, with its North American business delivering a 5.6% operating margin in the second quarter versus 3.9% in last year's Q2. While that may not sound like a massive improvement, it caused operating income to rise 58% year over year.
On the international side, Amazon posted a $273 million operating profit versus an $895 million loss last year. The international business hasn't steadily made a profit, but it will greatly boost Amazon's profit picture once it does.
According to CEO Andy Jassy, there's still work to be done. But if Amazon can continue improving its margin across its commerce businesses, it will help propel Amazon to new heights.
2. Advertising is a bright spot
Within Amazon's commerce division are advertising services, which are one of Amazon's fastest-growing segments. While investors don't know what its profit contribution is (hint: it's likely a lot), it has shown tremendous growth, posting year-over-year growth of at least 20% since Q1 2023.
Advertising is a known high-margin business (just look at Meta Platforms ), so any outsize growth in this segment should help boost Amazon's overall commerce margins. If advertising can deliver strong growth in the future, it will be a key factor in helping Amazon outperform the market.
3. AI fueling AWS growth
Another part of Amazon is its cloud computing business , Amazon Web Services (AWS). AWS has been an absolute cash cow for Amazon and has recently returned to growth mode due to new artificial intelligence (AI) workloads coming online.
AWS puts Amazon's commerce business to shame, posting 19% revenue growth in Q2 with an operating margin of 36%. It's critical that AWS continues to post strong quarters, as its growth helps fuel Amazon's profit growth in an outsize way. AI will significantly help AWS's growth case, which is paramount for maintaining its status as a strong stock.
4. AWS boosts Amazon's margins
As alluded to above, AWS makes up a huge chunk of Amazon's profits. In Q2, AWS accounted for 64% of Amazon's total operating income. This means that if AWS grows profits at a faster pace than the rest of the company, Amazon's profits will also rise at a quicker pace.
Some investors ignore this key factor, thinking Amazon is just a mature commerce business that can't get any bigger. Cloud computing is far from that, and AWS is set to benefit.
Mordor Intelligence projects that the cloud computing market opportunity will increase from $680 billion today to $1.44 trillion by 2029 -- a 16.4% compound annual growth rate . That massive growth is what AWS is primed to cash in on and will help Amazon become a market-crushing stock.
5. Massive free-cash-flow generation
Thanks to management's focus on efficiency, Amazon is now producing record free-cash-flow (FCF) levels .
AMZN Free Cash Flow data by YCharts .
Generating massive amounts of cash is the hallmark of a great business, as it can be used to reward shareholders through share repurchases, dividends, or debt repayment. It also adds to Amazon's cash hoard, which allows the company to pursue investment opportunities it thinks could become the next big thing.
Amazon has already proven its ability to build meaningful ancillary businesses with the integration of its delivery network, advertising services, and AWS. I don't know what Amazon's next big hit is, but it's likely already in development.
Amazon has a strong business and is expected to continue its dominance in the years ahead. These factors combine to make a stock that's slated to outperform the market, and I'm a buyer as a result .
Should you invest $1,000 in Amazon right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Keithen Drury has positions in Amazon and Meta Platforms. The Motley Fool has positions in and recommends Amazon and Meta Platforms. The Motley Fool has a disclosure policy .
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