On the surface, Amazon (AMZN) stock may look expensive with shares trading at 41 times earnings. However, a deeper analysis reveals several reasons why the stock justifies its premium valuation. Here are some main factors for investors to consider if they don't already own shares of this e-commerce and cloud-computing giant. Amazon is gushing with cash, which supports its high market capitalization of $1.8 trillion. The company's trailing 12-month operating cash flow is an impressive $108 billion. This substantial cash flow allows for significant reinvestment in its business while still producing noticeable free cash flow.
Total trailing-12-month free cash flow, after principal repayments of finance leases and financial obligations, stood at $53 billion. The company's price-to-adjusted free-cash-flow multiple of 34 is more approachable than its price-to-earnings multiple of 41. Despite a price-to-adjusted free-cash-flow multiple of 34 appearing steep, it's crucial to consider Amazon's thriving cloud-computing business, Amazon Web Services (AWS). Although AWS accounts for 16% of trailing 12-month sales, its importance to Amazon's overall business is substantial. AWS is expanding at a faster rate than the rest of Amazon's operations, meaning its percentage of revenue will increase over time.
In the second quarter, AWS revenue surged nearly 19% year over year. Further, AWS is significantly more profitable, with an operating income of $9.3 billion in Q2 and an operating margin exceeding 35%. The segment represented about 63% of Amazon's total operating income, indicating its growing impact on the company's profitability. Amazon CEO Andy Jassy underscored AWS's importance during the latest earnings call, highlighting its ongoing leadership in cloud computing. AWS's market leadership offers it scale and cost benefits, enabling aggressive reinvestment and rapid innovation.
According to Synergy Research Group, AWS holds nearly a third of the global cloud infrastructure market share, with Microsoft's Azure being the closest competitor, trailing by about six percentage points. Recognizing AWS as a growth driver clarifies the fundamentals supporting Amazon's current stock valuation. Another pivotal factor bolstering the bullish outlook on Amazon stock is the company’s competitive advantage through scale. As the largest e-commerce retailer and cloud-computing infrastructure provider globally, Amazon's scale is a competitive edge. The company can spread its fixed costs over a larger customer base than its peers, accelerating its progress more effectively.
This ability to invest more aggressively than competitors strengthens its economic moat. In summary, Amazon's significant cash flow, fast-growing and profitable cloud-computing business, and substantial competitive scale make its shares a compelling buy today. While there is always a risk that Amazon's competitive advantages in retail and cloud computing might diminish, given the company's history of rapid growth, expanding profitability, and market share leadership, this risk appears minimal.