Amazon’s cash flow story is making a comeback after a long hiatus.
Over the past year or so, a number of technology companies have made a splash in the world of artificial intelligence (AI). microsoft Things really started with an investment in OpenAI, the startup behind ChatGPT. For a moment, it looked like Microsoft had outsmarted the big tech companies.
But the e-commerce and cloud computing giant Amazon (AMZN -1.07%) It is beginning to emerge as a strong competitor in the AI field. Let’s dig into what Amazon is doing to accelerate its business and find out why now is a great time to scoop up stock.
don’t call it a comeback
The macroeconomy has faced severe challenges in recent years, with abnormally high inflation and rising interest rates impacting businesses and consumers. Unfortunately, Amazon’s e-commerce and cloud computing businesses are not immune to these measures, and the company’s financial results have suffered.
As of the end of the first quarter of 2023, Amazon’s trailing 12-month free cash flow was: negative 3.3 billion dollars. In fact, this graph shows the size of Amazon’s cash burn during periods of peak inflation and periods of slow growth.
AMZN Free Cash Flow (Quarterly) Data by YCharts
But fast forward a year, and the story has changed dramatically. Amazon’s free cash flow for the 12 months ended March 31 was $50.1 billion. Since bottoming out last spring, Amazon has turned its business around and consistently generated positive cash flow. One of the major factors behind this turnaround is the acceleration of cloud businesses in particular.
What has Amazon been doing to jump-start its cloud services? Like Microsoft, Amazon has made some notable moves of its own when it comes to AI.
Image source: Getty Images.
Don’t overlook investing in AI
Back in September, Amazon announced it would invest $4 billion in an AI startup called Anthropic. Interestingly, Anthropic’s co-founder originally came from OpenAI. Under the terms of the agreement, Anthropic agreed to primarily use Amazon’s cloud infrastructure, Amazon Web Services (AWS).
This is a subtle but beneficial element of the partnership with Anthropic, as it should lead to a new source of lead generation for AWS. Additionally, Anthropic plans to use Amazon’s Trainium and Inferentia chips to train future versions of its generative AI models. I also see this as a smart move by Amazon.
Currently, the AI chip market is dominated by: Nvidia. Nvidia will likely continue to hold a significant market share, but Amazon’s investment in developing its own chips and data centers could mean more profits in its cloud business in the long run. There is.
Amazon’s inventory seems to be worth a lot of money
I think many investors have overlooked Amazon’s progress and are thinking too narrowly about it as a macroeconomic issue. The current inflation rate of 3.5% is well above the Federal Reserve’s long-term target interest rate of 2%. However, it is important to understand how much inflation has cooled compared to peak levels two years ago.
This chart paints an interesting picture. Amazon’s price-to-sales (P/S) ratio reached a 10-year high in 2020. However, shortly thereafter, the company’s P/S ratio began to decline dramatically as inflation began to soar. Now that inflation is starting to subside, Amazon’s P/S multiple appears to be normalizing.
AMZN PS Ratio Data by YCharts
What I find interesting about this chart movement is that even though Amazon’s valuation multiple has increased, it is far from its previous highs. In addition to that, his P/S ratio on Amazon is the lowest among the “Magnificent Seven” series. Considering how much Amazon has grown over the past few years and redefined itself as an AI giant, I think now is a good time to buy the stock at a discount.
I think the growth story surrounding Amazon is clear. Although the company is in the early stages of its AI development, it has already made significant progress. I’m encouraged by Amazon’s momentum and am bullish on its ability to maintain this momentum, given the company’s strong financial position and dominant position in both e-commerce and cloud software.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Adam Spatacco has held positions at Amazon, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Amazon, Microsoft, and Nvidia. The Motley Fool recommends the following options: His January 2026 $395 long call on Microsoft and his January 2026 $405 short call on Microsoft. The Motley Fool has a disclosure policy.
