A lot of the US stocks that I like the best are outside the S&P 500. But sometimes there are great opportunities that are hidden in plain sight.
I think Amazon (NASDAQ:AMZN) is one of these. Everyone knows more or less what the company is and what it does, but it’s especially interesting to me at the moment.
A change of direction
It’s easy to see why a lot of investors – especially value investors – aren’t interested in Amazon shares. For one thing, the stock trades at a price-to-earnings (P/E) ratio of 45.
That means shareholders aren’t likely to see huge dividends any time soon. But the company’s profitability might be set for a significant jump in the near future.
For years, Amazon has been focused on making investments to improve its competitive position. That has made profits look surprisingly low.
More recently, though, the business has started to shift its direction. And a focus on free cash flow generation could make the stock look like very good value over the next year or so.
Profits imminent
Historically, Amazon has never looked like a cash machine. Up until 2022, operating margins had never been higher than 6%, which is low by just about any standards.
Over the last 12 months, though, revenues have been $116.5bn and its operating income has come in at $60.6bn. That implies a margin of around 52% – quite the jump.
This is showing up in the company’s cash flow statement as well. In the 12 months ending in September 2023, Amazon generated $21.4bn in free cash.
In 2024, this figure reached $47.7bn – an increase of 123%. In my view, that’s the clearest sign the business is starting to realise its potential from an investment perspective.
The big risk
I think a shift to focusing on profits and cash generation could be a very good thing for the Amazon share price. But there is also a big risk for investors to consider.
Like a number of other US companies, Amazon has been the subject of regulatory attention over the last few years. The issue is the methods it uses to maintain its competitive position.
So far, the issues have largely come and gone without any long-term consequence. But seeing profits growing rapidly might cause regulators to take another look.
There’s not much Amazon can do about this – it’s something investors just have to be aware of and factor into their thinking. But even with this in mind, I continue to think the stock, which I own, looks attractive.
Long-term investing
I think Amazon is a great example of the benefits of long-term investing. For a long time, the stock has looked expensive and investors have had to look past a high P/E ratio.
But things are starting to change – and it looks to me as though patient investors are set to be rewarded. As free cash flow starts to pick up, I expect the share price to do the same.
