Time to DOUBLE UP on Amazon?

Amazon just reported earnings and I have to tell you these results have me seriously considering adding more to my position. Don't get me wrong, it was not all positive by any means, but they are building something massive because while investors have been worried about AI spending, Amazon just delivered some impressive results across the board. We have seen the story written before. Amazon invests heavily to expand its e-commerce business. Amazon invests heavily to speed up delivery. Amazon invests heavily to build out cloud and now investing heavily to build out AI. And every single time that they have invested significant dollars, it's paid off. So you have to ask yourself, do you trust this current management team or not when it comes to these investments? And that creates a fascinating question. Is Amazon building one of the most profitable businesses in the world or is it spending too aggressively to chase the AI opportunity? So in today's video, we are going to look at the latest results of Amazon. We will also compare those results to another large position of mine, which is Alphabet, and determine whether the current valuation is attractive enough for me to potentially add significantly to my position. So, before we jump in, do me a huge favor and smash that like button down below. And let me thank today's video sponsor, which is Upside. I love having Upside, and I know you're going to love it as well, especially as we enter the holiday months. The Upsite app is the easiest way to earn cash back on things like restaurants, gas station, grocery stores, and more. On the homepage of the app, you can find certain offers depending on what you're looking for. You can search specific restaurants and zoom in and out for other offers around that area. There has been over a billion dollars return to Upside users in the form of cash. We're not talking about points, but real cash back. 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Now, 12% might not sound particularly exciting compared with some of the other semiconductor companies or high growth companies we discuss on this channel, but remember Amazon is generating more than $200 billion in revenue in a single quarter, which is wild to think about. And here's an important detail. Amazon moved its Prime Day into the second quarter this year, whereas the event occurred during the third quarter last year, making comps not entirely apples to apples. But the fact that they still saw 12% growth without Prime Day this year and going against Prime Day last year, that tells an entirely different story. But here's where results become particularly interesting. Operating income increased from 17.4 billion to 28.1 billion. That's approximately 61% growth. Think about that for a second. I just told you that revenue grew 12%, but operating income increased more than 60%. That's a company becoming more efficient. And on top of that, Amazon reported an operating margin of approximately 14%. That's the highest quarterly operating margin in the company's history. That right there is a combination that I love to see. Still a company growing its top line, but becoming much more efficient and that operating income growing faster. How does this come about, you might ask? Through prior investments. Now, why is that important? because Amazon has historically operated with relatively thin profit margins due to its enormous retail and logistics operations. But we're seeing the company become much more efficient and its higher margin segments become a bigger piece of the entire pie. And when a business with more than $200 billion in quarterly revenue begins expanding operating margins, even relatively small improvements can translate into billions of dollars in additional operating income. That there is called operating leverage. And I believe that's one of the most compelling parts of the Amazon investment thesis. But there's one segment that really tells the growth and efficiency story, and that's AWS. Amazon Web Services reported approximately 46 billion in quarterly revenue. That's growth of 39% year-over-year. And here's what makes that particularly impressive. AWS is already an enormous business and growing every quarter. We're talking about annualized revenue run rate approaching $185 billion. Yet growth is still accelerating. the fastest we have seen, which is crazy good. In fact, management described this as AWS's fastest growth in nearly 5 years on an annualized pace. Now, I want you to think about that and what that means for this business. The largest technology companies in the world are spending enormous amounts of money building AI infrastructure. And some investors have started questioning whether the AI investment cycle is slowing or they're questioning is there an ROI that's coming soon. And that's the problem. So many investors, including those that call themselves professionals, just look at certain figures and take them at face value. But when you look at AWS growth of nearly 40%. That doesn't look like demand is disappearing. In fact, they have more demand than they can bring online. And it's not just revenue. AWS generated approximately 18 billion in operating income during the quarter. That's up from approximately 11.4 billion a year ago. So operating income increased about 55% for that segment alone. Now AWS operating margin that was an impressive 38.7%. Still slightly below the previous quarter but still an exceptional level of profitability we are talking about. And that's an important distinction. AWS is growing rapidly while generating enormous operating profits. But here's what really caught my attention. management indicated that it expects AWS revenue growth to exceed 40% not just next year but also in 2028 as well. Now, those are projections, not guarantees, but we're talking about a management team that never gives guidance that far out, which tells me they are confident. And that number probably ends up being even higher and the growth rate even higher because we're talking about a business approaching 200 billion in annualized revenue. And Amazon believes it can continue growing at an extraordinary pace. Now, where is the demand coming from? Several paces. Companies are migrating more workloads to the cloud. Businesses are developing AI apps. Demand for inference is increasing. And enterprises are beginning to deploy AI agents across their operations. I mean, as an investor, you cannot look at these cloud growth figures that we've seen from the likes of Microsoft, Alphabet, and now Amazon, and tell me AI is slowing. You just can't. In addition, another big future growth driver is the fact that Amazon also continues investing in its custom AI chips, including Tranium. And I believe that's particularly important because as AI computing becomes more expensive, customers are going to look for ways to improve performance while controlling cost. Amazon has a opportunity to offer both traditional GPUbased infrastructure and its own custom silicon that could improve its competitive positioning over time. And here's another important point. The AI opportunity isn't limited to training enormous models. As more businesses begin deploying AI applications, inference demand could become an increasingly important source of reoccurring cloud revenue. And again, AWS is positioned to benefit again. Now, I don't want to suggest that Amazon has no competition. Microsoft Azure, they're growing rapidly. Google Cloud was the bright spot in the Alphabet earnings report. We just saw that from recent results from those companies. But I believe AWS has an attractive combination of scale, enterprise relationships profitability and infrastructure capabilities. And that's a big reason Amazon will continue to be a stock in my portfolio and one I continue to add to on the dips. Now, here's something I don't want investors to overlook. Amazon isn't just an AI and cloud computing company. It also operates one of the largest retail and logistics networks in the world. And the retail business is in fact the biggest piece of the business. So, it's hard to overlook. And that segment though, it's becoming much more profitable, which I love to see. Let's take a look here at the North America business where revenue increased approximately 6% to nearly 113 billion, but operating income increased from approximately 4.8 billion to 8.7 billion. That's an increase of more than 80%. Again, topline revenue growth, but operating income growing even faster as the company finds more efficiencies. If Amazon can continue improving fulfillment and efficiency, delivery, density, inventory management, and automation, margins could continue expanding even further. And remember, Amazon has invested enormous amounts of money building its fulfillment network. And we are seeing those efficiencies play out now. Now, another business I believe deserves attention is advertising. Amazon has quietly become an important player in digital advertising and its advertising opportunity is particularly interesting because Amazon knows what customers are actually shopping for. That's valuable information. A consumer searching for a product on Amazon may already be relatively close to making a purchase and that makes Amazon's advertising platform attractive to brands. Over the past 12 months, Amazon generated $78 billion in ad revenues, growing every year and showing nearly 21% growth year-over-year. And I believe the combination of retail efficiency and advertising growth could continue supporting margin expansion. And yet, we're not done. There's yet another opportunity. And that's the thing I love about Amazon. It is such a well- diversified business, which because of that, they can afford to invest in other areas of the business. But the next opportunity I want to talk about is automation and robotics. I personally believe robotics is a big area to benefit as an investor over the course of the next decade plus. And in fact, I'm working on a video around that very topic. But for Amazon, they have spent years investing in technology designed to improve productivity across its fulfillment network. And those systems become more sophisticated year in and year out. Yet, the company could potentially lower fulfillment costs even further. Now, those savings aren't guaranteed and implementing new technology. It requires capital. But I believe Amazon has significant opportunity to improve the profitability of a business that already generates hundreds of billions of dollars in annual revenue. And that's something I find extremely compelling. Now, here's where things get particularly interesting because Alphabet, it remains my largest individual stock holding. And I recently published a video discussing why I was concerned about their report. And I want to be clear, I'm not selling Alphabet. still believe that Google owns some of the most valuable businesses in the world. Google search, YouTube, Google Cloud, Android, and an extraordinary collection of AI technologies. But after reviewing the latest earnings reports for both Alphabet and Amazon, I prefer Amazon for my next invested dollar. And here's why. When thinking and looking at Alphabet, their ad revenue, which is again, that's their bread and butter, fell well short of expectations for the second quarter in a row. Cloud numbers though those were particularly strong for both companies. But when you look at Alphabet, their cloud figure is not one of their largest pieces of the business. However, when you looked at Amazon AWS, strong piece of the business, strong results. Their core business though, retail, strong results. Yes, both companies are spending more cash than they're generating, which is a negative. But of the two, Amazon appears to be in a much better situation in my opinion. AI may be growing for some areas of Google, but the thing you have to ask yourself is it compromising their key segment? That's the question, and that's something I'm watching closely. Now, Amazon isn't immune to disruption. AI shopping assistants could eventually direct customers to competing marketplaces. In fact, Meta's Muse agent is blocked on Amazon, but I would think that Amazon is working on their own personal shopper themselves, which would be a big beneficiary. But here's my view. Amazon appears to have more opportunities to use AI to expand its existing profit pools while Alphabet faces a more direct risk. The AI could disrupt one of the most profitable businesses they have. That's the distinction I'm focused on. Now, here's the next reason I prefer Amazon. They have operating momentum. Amazon's consolidated operating income that increased approximately 61%. Alphabet's operating income increased approximately 30%. Both are strong results, but Amazon is demonstrating substantial operating leverage across multiple businesses, and that gives me more confidence in the company's ability to expand profitability over time. But there's one major issue with Amazon that we absolutely need to discuss, and that's free cash flow, or lack thereof, I should say. Now, here's where I want to challenge the bullish argument because if we're going to talk about doubling a position to Amazon or investing heavily and increasing our position, we need to understand the risks. And the biggest one right now is capital spending. Amazon reported approximately 168.3 billion in operating cash over the trailing 12 months. That was an increase of nearly 30% year-over-year. So the underlying business itself is generating enormous amounts of cash. But here's the problem. Once you take into account the capital expenditures, Amazon reported approximately 46.9 billion in free cash flow over those trailing 12 months. That's compared with positive free cash flow of approximately 32.9 billion at the end of 2024. Think about that. We have gone from generating nearly 33 billion in positive free cash flow just a few years ago to consuming more than 46 billion. That is a massive deterioration. And the primary reason is the investment we're seeing in AI infrastructure. Amazon is spending enormous amounts of money on data centers, advanced computing systems, and other infrastructure. Now, some investors might say that's perfectly fine. Amazon is investing today to generate future growth. And there's certainly merit to that argument that I personally agree with, but that doesn't mean I don't have my concerns as well as many others. And here is the main concern investors have right now. At some point, these investments need to generate an attractive return on investment capital because growth alone doesn't create shareholder value. You can grow revenue rapidly and still destroy value if the cost of generating that growth is too high. And that's why I don't want to dismiss negative free cash flow simply because AWS is growing quickly. Now, Amazon is expecting approximately 220 billion in capex this year and management has already alluded to those figures going higher in 2027. That's extraordinary and it creates several risks. First, if AI demand slows, which there's no indication of that happening right now, but there's always the naysayers. If it did, Amazon could find itself with expensive infrastructure that isn't being utilized as efficiently as expected. Just have to mention it. Second, technology changes quickly. The useful economic life of certain computing assets could be shorter than investors anticipate. And third, if capital expenditures continue rising faster than operating cash flow, well, free cash flow could remain negative for an extended period of time, and that could eventually pressure valuation. Now, here's what gives me some confidence. AWS is growing rapidly. The retail business in itself is becoming more profitable and operating cash flow continues increasing. So, Amazon has substantial cash generating businesses helping fund these investments. But I still want to see the company demonstrate that this spending will eventually translate into significantly higher free cash flows. Now, because if it doesn't, this investment thesis becomes considerably less attractive. And that brings us to valuation. Now, here's the question that ultimately determines whether I'm interested in doubling or adding significantly to my Amazon position. Again, it's already a top five holding for me. Is the stock trading an attractive value? Because I can love the business. I can love the AWS growth we're seeing or the margin expansion. And I can believe Amazon has an enormous opportunity in the world of AI, but that doesn't mean I'm ready to buy it at any price. So, when we look here at forward PE, we can see the stock trades at 24 times, well below its historical 5-year average of 46 times. But let's not sit here and act like that's where the stock should be trading, considering how large it's become. Now, the metric I like to focus on when looking at Amazon is EV to Ebida. And I have found that when I buy below the 5-year average, I've made out pretty well on my invested dollars. And right now we can see the stock has a forward EV to IBIDA of just about 10 times which is incredibly low and near the lowest levels we have seen in the company's history. This is how you can find deals as investors where one thing overshadows a strong business and you can buy the dip. Where a company's fundamentals are rising while the stock price declines. But this in it of itself does not dismiss the negative free cash flow. And that's where I believe investors need to be careful because if we assume capex eventually declines, free cash flow could improve dramatically. But what if spending remains elevated for years? What if AWS growth suddenly slows? Or what if the company needs to continue investing aggressively simply to remain competitive? Those are very different outcomes and they would justify very different valuations. So when I evaluate Amazon today, I'm not simply looking at its current earnings multiple. I'm looking at the potential earnings growth over the next several years. I'm evaluating the sustainability of the AWS growth. I'm considering the opportunity for retail margin expansion and I'm trying to estimate what would normalized free cash flow eventually look like in the future. So that brings us back to the title. Is it time to double up on Amazon? And here's where I stand. After reviewing these earnings, Amazon is one of the companies I'm most interested in adding to and likely will add to very soon. AWS is accelerating. Operating income is growing significantly faster than revenue. Retail margins have expanded, and the company has several attractive long-term opportunities tied to AI, advertising, automation, and cloud computing. But I also have concerns. Free cash flow is deeply negative. Capex, it's continuing to rise, and Amazon faces substantial competition across several of its businesses. So, I'm not going to ignore those risks. But when I compare Amazon with Alphabet after their latest earnings reports, I easily prefer Amazon for additional investment. That doesn't mean again I'm abandoning Alphabet. It remains my largest holding. But I believe Amazon offers an attractive combination of growth opportunities and improving operational profitability. I love to accumulate shares over time and add slowly because no stock only goes up. I can remain patient and buy these dips and I could take advantage of additional volatility if the market provides it. Now, I want to hear from you. After these latest earnings reports, which stock would you rather own for the next 5 years, Amazon or Alphabet? And do you believe Amazon's massive AI investment will eventually pay off? Or are you concerned about the negative free cash flow? Let me know in the comments below. Make sure you join my private investing community by scanning that QR code on your screen or by using the link down in the description below. And if you appreciate this stock analysis that looks beyond the headlines and examines both the opportunities and the risk, make sure you smash that like button down below, subscribe to the channel, and we'll see you in the next one. Take care. >> [music]