It’s been a tumultuous week for the stock market as investors navigated uncertainty surrounding interest rates. Following the Federal Reserve’s inaugural meeting under the leadership of new Chair Kevin Warsh, interest rates were held steady. However, the Fed signaled the possibility of a rate hike later this year, leading to declines in major indices such as the Nasdaq and S&P 500. This was compounded by an early June sell-off that affected many stocks in the artificial intelligence (AI) and semiconductor sectors.
Despite this volatility, some analysts believe there are opportunities for savvy investors. They suggest that periods of market downturns can be ideal for identifying stocks that may have declined more than warranted.
A historical reference points to Nvidia in 2009 when a similar “Double Down” signal emerged. Currently, a “Total Conviction” signal is being noted for a company significantly smaller than Nvidia, sparking interest among market watchers.
One potential long-term investment candidate that analysts favor is Amazon (NASDAQ: AMZN). As of recent trading, shares were priced around $244, approximately 12% below their recent high of $278.56 observed in early May. Despite the broader market fluctuations, Amazon’s performance has been noteworthy, especially in its core cloud computing business, Amazon Web Services (AWS).
AWS is experiencing rapid growth, with first-quarter revenues climbing 28% year over year to $37.6 billion. This marks the fastest growth rate in 15 quarters and signals strong momentum for the service, which has reached an impressive annual revenue run rate of $150 billion. Amazon’s CEO, Andy Jassy, highlighted that such growth is rare at this scale, noting it was unprecedented when AWS was smaller.
Crucial to this growth is AI. AWS’s AI-related revenue has surged from virtually negligible amounts three years ago to over $15 billion in annual run rate, bolstered by a substantial order backlog that includes significant commitments such as a recent $100 billion deal with Anthropic.
Additionally, AWS is not only Amazon’s fastest-growing segment but also its most profitable, contributing about 21% of the company’s $181.5 billion first-quarter revenue while accounting for a remarkable 59% of its operating income. This success has driven Amazon’s overall operating margin to record levels.
Amazon is further fortifying its infrastructure by developing its own custom chips, which now boast an annual revenue run rate exceeding $20 billion, a remarkable 40% increase from the previous quarter. This strategic move is expected to reduce reliance on external suppliers and lower operational costs significantly, enhancing margins for AWS over time.
However, such growth comes at a cost. Amazon anticipates capital expenditures of around $200 billion through 2026, including $43.2 billion earmarked for the first quarter alone, mainly aimed at expanding AWS and AI capabilities. As a result, free cash flow has shrunk to approximately $1 billion, compared to much higher figures from the previous year.
Nonetheless, executives believe these investments are essential. Jassy remarked on the transformative potential of this moment, portraying it as a “once-in-a-lifetime opportunity” that could redefine countless applications across industries.
While Amazon’s current price-to-earnings ratio stands at around 31, making shares neither cheap nor prohibitively expensive, there are risks associated with this strategy. Concerns arise if AI investments don’t yield expected returns, potentially straining profits and cash flow over an extended period. Additionally, rising component costs, particularly in memory, pose challenges.
In summary, analysts suggest that Amazon may be a solid long-term investment, given its leading position in the cloud services market and the growing momentum in AI. While short-term market movements may exhibit volatility, the company is well-positioned to capitalize on future growth opportunities.
For investors considering Amazon, it is advisable to weigh potential risks and the company’s ongoing capital commitments. Those interested may also take note that other investment lists have highlighted alternative opportunities for long-term growth, demonstrating the competitive landscape.
