Amazon just gave 4 good reasons to buy its stock

Amazon (NASDAQ:AMZN) is in motion. Shares of the e-commerce and cloud services giant have risen over 30% in 2024. This solid performance comes on top of an 80% gain over the last year. The company recently extended its streak of beating Wall Street's earnings expectations with the release of third-quarter earnings on Thursday.

Perhaps the best news for investors, however, came in Amazon's third-quarter earnings call. The company just gave four good reasons to buy its shares.

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What is the most important financial ratio for a company? I think there's a strong argument that it's free cash flow. Profits can sometimes be temporarily manipulated, but what you see is what you get with free cash flow.

Amazon reported free cash flow of $47.7 billion for the trailing 12 months ended Sept. 30. This represents an increase of 123% compared to the previous year. Free cash flow adjusted for equipment finance leases was $46.1 billion, up 128% year-over-year. This is amazing growth.

CEO Andy Jassy said on the third-quarter earnings call: “Our primary focus here is free cash flow.” That's exactly what investors want to hear from top executives. As free cash flow increases, stock prices also rise in the long term.

Amazon Web Services (AWS) remains the strongest growth driver for Amazon. AWS revenue rose 19% year-over-year to $27.5 billion in the third quarter. The unit generated nearly 60% of Amazon's total operating income.

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

How important is the generative AI opportunity for AWS? The unit has launched nearly twice as many generative AI and machine learning capabilities as the other top cloud service providers combined.

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

While AWS is Amazon's superstar, we can't ignore the company's core e-commerce business. After all, e-commerce is still Amazon's largest source of revenue. And it could represent a bigger growth opportunity than you might think.

As Jassy explained in the third-quarter conference call, Amazon currently only has about 1% market share in the massive global retail market. He said between 80 and 85 percent of retail sales still come from brick-and-mortar stores. Then Jassy delivered the bombshell: “So if you think the equation is going to flip in the next 10 to 20 years, which is what we're doing, then there's just a lot of opportunity, not just for us, but for multiple players.”

Amazon is working hard to capitalize on this big opportunity. The company shortens delivery times, improves operational efficiency and offers more cost-effective products. These efforts are paying off. In the third quarter, Amazon Store sales increased 9% year-over-year in North America and 12% internationally.

Advertising is another important growth driver for Amazon. The company's third-quarter advertising revenue totaled $14.3 billion, up nearly 19% year-over-year. Jassy said: “Although we generate a lot of advertising revenue today, there is still significant upside potential.”

One way Amazon can increase its advertising revenue is by improving the relevance of the ads it serves to online shoppers. The company also just launched its first season of Prime Video advertising.

Amazon isn't just talking about delivering strong free cash flow growth; it delivers. There's no denying the impressive growth of AWS, particularly its AI business. Jassy is right about the enormous opportunity for retail, even if e-commerce won't expand as much as he believes in the next two decades. He's also almost certainly right that Amazon can significantly increase its advertising revenue.

Few companies can boast a track record comparable to that of Amazon. Few offer so many great growth opportunities. So should you buy Amazon shares spontaneously? I think so.

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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. Keith Speights holds positions at Amazon. The Motley Fool has positions on Amazon and recommends them. The Motley Fool has a disclosure policy.

Amazon Just Named 4 Good Reasons to Buy Its Stock Hand Over Fist was originally published by The Motley Fool

Amazon just gave 4 good reasons to buy its stock

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