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Many of my favorite US stocks are overseas S&P 500. But sometimes there are great opportunities hidden in plain sight.
I think Amazon (NASDAQ:AMZN) is one of these. Everyone knows a little bit about what the company is and what it does, but it’s very interesting to me right now.
A change of direction
It’s easy to see why many investors — especially value investors — aren’t interested in Amazon shares. First, the stock trades at a price-to-earnings ratio (P/E) of 45.
That means shareholders likely won’t see big gains anytime soon. But the company’s profits may be set for a significant jump in the near future.
For years, Amazon has focused on monetization to improve its competitive position. That made profits look surprisingly low.
Recently, however, the business has begun to change its direction. And focusing on generating free cash flow could make the stock look like a great value over the next year or so.
Profit is at hand
Historically, Amazon has never looked like a money machine. Until 2022, operating margins were never above 6%, which is low by almost any standards.
In the last 12 months, revenue was $116.5bn and operating income came in at $60.6bn. That means a margin of almost 52% – quite a jump.
This is also reflected in the company’s cash flow statement. In the 12 months ending September 2023, Amazon generated $21.4bn in free cash flow.
By 2024, this figure reached $47.7bn – an increase of 123%. In my opinion, that is a very clear sign that the business is starting to realize its potential from an investment perspective.
A big risk
I think a shift to focus on profitability and revenue generation would be a very positive thing for Amazon’s share price. But there is also a big risk for investors to consider.
Like many other US companies, Amazon has been the subject of legal attention over the past few years. The problem is the methods it uses to maintain its competitive position.
So far, the problems have come and gone without long-term consequences. But seeing profits grow quickly can cause regulators to look elsewhere.
There’s not much Amazon can do about this – it’s something investors should be aware of and factor into their thinking. But even with this in mind, I continue to think that the stock, which I own, looks attractive.
Investing for the long term
I think Amazon is a great example of long term investment returns. Long term, the stock looks expensive and investors have had to look beyond the high P/E ratio.
But things are starting to change – and it looks to me like patient investors will be rewarded. As free cash flow begins to rise, I expect the share price to follow suit.
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