Amazon (AMZN) has several strong growth engines that should cause the expansion of its revenue and operating income to accelerate over the medium-to-long term. Meanwhile, the stock’s valuation is quite low compared to the levels of the last few years.
In light of these points, I encourage long-term investors looking for increased exposure to Big Tech stocks to consider buying AMZN.
Project Kuiper
Project Kuiper is Amazon’s satellite internet project. After launching its first 27 satellites in April, Kuiper hopes to have 1,663 satellites in orbit and working by July 2026. It has said that it may begin offering service to its customers by the end of this year.
Emulating SpaceX’s Starlink, Project Kuiper appears to be looking to provide internet services to the Pentagon and the militaries of other countries. To compete more effectively with Starlink, Kuiper is partnering with defense giant L3Harris Technologies (LHX). Specifically, L3 is helping Kuiper develop satellite payloads that comply with the military’s requirements.
Like Starlink, Kuiper will be able to provide internet service to consumers in remote areas of the U.S.
In an emailed statement to ClearanceJobs, Bob Bilbruck, the CEO of Captjur, wrote “In the medium to long term, if Kuiper proves to be reliable, secure, and cost-effective, it could carve out a significant role within the Pentagon’s broader satellite communication strategy.” But he also noted that “In the next few years, it’s more likely that the Pentagon will continue to rely heavily on Starlink due to its established track record and proven effectiveness. ”
Bilbruck said that he has been a consultant on issues related to the defense sector and Internet Service Providers (ISPs) for 21 years. Captjur is “a strategic consulting and business services firm,” he stated.
According to one estimate, Starlink generated revenue of $8.2 billion in 2024. If Kuiper reaches $4 billion of revenue with operating margins of 50%, the initiative would boost Amazon’s operating income by $2 billion. In 2024, the tech giant’s operating income was $68.6 billion. So Kuiper may boost the company’s operating income by a few percentage points in the not-too-distant future.
Amazon Pharmacy
In the past, AMZN CEO Andy Jassy has said that the company’s pharmacy unit, Amazon Pharmacy, was expanding “really quickly.” Further, the wife of CNBC anchor Brian Sullivan, whose job involves consumer research, reportedly found that Amazon was gaining market share in the retail pharmaceutical sector from brick-and-mortar retailers.
Meanwhile, Amazon’s pharmacy business may be benefiting from a cycle of its revenue increases and the closures of brick-and-mortar pharmacies in the U.S. Specifically, as AMZN takes market share, more stores close their doors, further increasing AMZN’s revenue and decreasing the revenue of the owners of brick-and-mortar retailers. The latter phenomenon, in turn, triggers the closure of more stores. CVS (CVS), Walgreens (WAG), and Rite Aid (RAD) are all closing large numbers of their stores, likely keeping the cycle going.
And according to one estimate, “prescription dispensing revenue” in 2024 in the U.S. came in at $683 billion last year. If Amazon’s share of that revenue increases by 5% annually and its operating margin on those sales is 10%, Amazon Pharmacy will boost the company’s overall operating income by $3.4 billion annually. That would represent an additional 5% increase in its operating income, based on its 2024 OI.
Cloud Revenue and Chip Sales
The revenue and operating income of Amazon’s cloud-infrastructure unit, AWS, continues to expand rapidly. Last quarter, for example, AWS’ revenue climbed 17% versus the same period a year earlier, while its operating income rose to $11.5 billion, up from $9.4 billion in Q1 of 2024. As the demand for cloud computing and the AI tools sold by AWS increase amid the AI Revolution, the unit is likely to continue to generate impressive growth.
And the revenue generated by AWS’ AI chips could easily explode higher. That’s because Amazon contends that the Trainium AI chip that it built provides the same performance as Nvidia’s (NVDA) widely used H100 AI chip, at just 25% of the price. Encouragingly, Amazon recently reported that the demand for its Trainium chips is higher than its supply of them.
Historically Low Valuation and the Bottom Line on AMZN Stock
Amazon’s valuation is historically low by many measures. For example, its enterprise value/EBIT ratio, which stood at 31.3 times as of June 18, is at one of the lowest points over the past five years. (EBIT stands for earnings before interest and taxes. Enterprise value is a measure of a company’s valuation that takes into account its debt, cash and cash equivalents. ) In fact, the only times it was meaningfully lower was over the last few months. And the ratio has generally been much higher over the last several years. For example, in December 2023, it stood at 59.5 times and in August 2022 it was 86.8 times. The ratio in August 2020 was nearly 100 times.
With Amazon likely to benefit meaningfully over the longer term from the growth engines that I’ve described and its valuation standing at historically low levels, the shares could handsomely reward patient, long-term investors.
*This article is intended to be informational only; it is not financial advice.
