Soaring Investment Opportunity: Permanent Hold Recommendation for Outstanding Equity
Long-term investors ought not to buy shares in a company based on its performance during a specific quarter. However, these quarterly reports can sometimes contain hints regarding a company's investment strategy and long-term prospects.
Let's discuss Amazon (AMZN -0.76%), the globally recognized e-commerce giant, which recently published impressive third-quarter results. The stock surged following the announcement, highlighting that even the largest corporations can continue to expand and are worthy of long-term investment.
Amazon's path to success
In Q3, Amazon's revenue grew by 11% year-over-year, reaching $158.9 billion. Although the rate of growth isn't as high as before, this is to be expected as a corporation expands to such an immense size.
What truly matters is that Amazon remains dedicated to the strategies that led to its previous successes. Originally an online bookstore, Amazon recognized the potential of internet commerce and seized the opportunity.
Amazon's breakthrough came with the launch of its cloud computing division, AWS, in 2006, which has since become its most profitable segment.
Now, Amazon is fully immersed in the artificial intelligence (AI) field, providing a variety of AI-related services and continually introducing more to cater to its customers' needs.
AI has experienced significant growth, having recently reached a turning point and embarking on a long-term expansion path. Amazon is ideally positioned to capitalize on this trend.
During their third-quarter earnings conference call, Amazon CEO Andy Jassy stated, "Amazon Web Services' AI business is a multibillion-dollar revenue stream that continues to expand at a triple-digit year-over-year rate and grows faster than AWS itself did at its developmental stage."
Consider the potential growth of Amazon's AI business in a couple of years if this trend continues, or over five or ten. This isn't solely about AI; it's more about Amazon's knack for recognizing and capitalizing on profitable growth opportunities.
Amazon's financials are equally impressive, with net income increasing by 54.5% in Q3 to $15.3 billion. Free cash flow, at $47.4 billion, more than doubled compared to the previous year. The pursuit of new opportunities often requires substantial capital, and Amazon has no shortage of it.
A formidable barrier to competition
Despite numerous opportunities for growth, Amazon's rivals must be kept at bay for it to truly thrive. This is where competitive advantages come into play.
They can stem from varied sources: intangible assets, switching costs, and network effects, among others. All three are present, to some extent, in Amazon's case.
Amazon's most significant intangible asset is its prestigious brand, regularly ranked as one of the most valuable in the world. Amazon's main website is one of the most frequently visited globally. Customers looking to buy online often gravitate toward Amazon naturally, perhaps even subconsciously.
Next, Amazon's AWS benefits from high switching costs. These can be actual fees incurred when switching to a different cloud provider. However, the process can also be costly in terms of time spent deciding on a new provider and the effort required to migrate data. Companies are unlikely to undertake this without a compelling reason. Companies with high switching costs can charge higher prices.
Lastly, Amazon's e-commerce platform benefits from the network effect, as the more retailers that use it, the more attractive it is to consumers, and vice versa. So while competition will remain, Amazon's robust competitive edge makes it likely to maintain its leadership in its various niches for a long time. Additionally, Amazon's ventures into video and music streaming, healthcare, or its grocery business should also contribute to its longevity as a market leader.
In light of Amazon's impressive financial performance and dedication to innovative strategies, such as its successful expansion into AI, long-term investors might consider investing in its finance, given its ability to generate substantial revenue and free cash flow. Moreover, Amazon's competitive advantages, including its prestigious brand, high switching costs, and network effect, make it a formidable player in various markets, ensuring its longevity as a market leader.
