Buy Amazon Stock at All Time Highs? - What You Need to Know
Summary
Daniel provides a comprehensive analysis of Amazon's Q1 earnings, highlighting several key factors that led him to significantly increase his position in the company. He emphasizes that Amazon's revenue increased by 17% to $181.5 billion, with AWS sales accelerating by 28% year-over-year to $37.6 billion and operating income growing by 30% to $23.9 billion. Daniel particularly focuses on the company's operating cash flow, which was up 30% in the trailing 12 months, reaching an all-time high of approximately $149 billion. He sees this as a strong indicator that Amazon's capital expenditures (CapEx) are effectively paying off and that the business's true cash flow potential is growing, despite free cash flow declining due to aggressive investment in AI and AWS infrastructure.
He draws parallels to Amazon's historical CapEx cycles, demonstrating that every significant investment period has been followed by an explosion in free cash flow, setting new all-time highs. Daniel views the current intense CapEx phase as a precursor to massive future free cash flow generation. Furthermore, he finds Amazon's Q2 guidance bullish, as it projects accelerating quarter-over-quarter revenue growth on an FX-neutral basis, which he believes is not widely recognized. The video also points out Amazon's significant operating leverage, where even a small increase in North American operating margin led to a substantial rise in operating income.
Daniel stresses that Amazon has multiple large, highly profitable business segments—including third-party seller services (14% growth), advertising services (24% growth), and subscription services (15% growth)—all of which are accelerating. A major highlight for Daniel is Amazon's 'hidden' chips business, which he describes as one of the largest in the world, generating over $20 billion in annual revenue and growing at triple-digit percentages year-over-year. He notes that if this business sold chips to third parties like competitors, its annual revenue run rate could be $50 billion, potentially double the size of AMD's data center business. Daniel believes that Amazon's custom silicon (Trainium, Graviton) offers superior price-performance and has substantial customer commitments and backlogs, making Amazon an undervalued way to gain exposure to the booming chip industry.
From a valuation perspective, Daniel states that Amazon's price-to-operating cash flow ratio of 20.1x is still well below its historical average of 26.6x, even at all-time stock highs. He presents two discounted cash flow (DCF) scenarios: one with 16% annual operating cash flow growth and a 20x multiple, yielding a fair value of $309 per share and a 14.6% compounded annual growth rate (CAGR); and another with 20% growth and a 22x multiple, resulting in a fair value of $376 per share and a 22% CAGR. Daniel considers these scenarios realistic, affirming his belief that Amazon stock is currently undervalued and offers substantial upside.
Mentioned Stocks
Reasoning: Daniel significantly increased his Amazon position after Q1 earnings, believing the stock is still offering value despite being near all-time highs. He highlights strong Q1 results with 17% revenue growth, 28% AWS sales growth, and 30% operating income growth. Daniel focuses on the 30% increase in operating cash flow, viewing it as a sign that CapEx is paying off and the business's true cash flow potential is expanding. He views the current CapEx cycle as a historical pattern leading to future free cash flow explosions. The company's Q2 guidance is bullish, projecting accelerating revenue growth on an FX-neutral basis. Amazon demonstrates significant operating leverage and has multiple accelerating, profitable segments. A key reason for his buying decision is Amazon's 'hidden' chips business, which has over $20 billion in annual revenue, is growing triple-digits year-over-year, and has over $225 billion in revenue commitments for its Trainium chips. Daniel believes Amazon is an undervalued way to get exposure to the booming chip industry. His DCF analysis, even with conservative growth rates (16-20% OCF growth) and a multiple (20-22x OCF) below historical averages, suggests a fair value of $309-$376 per share, indicating the stock is undervalued.
Reasoning: AMD is noted as a 'skyrocketing' chip stock in the market. Daniel contrasts its performance with Amazon's chip business, which he argues is larger and better (with a potential $50 billion annual revenue run rate compared to AMD's $17 billion data center business), yet Amazon's stock does not reflect this value as much as AMD's.
Reasoning: Intel is also mentioned alongside AMD as a chip stock that is 'absolutely skyrocketing'. Daniel uses this to highlight the discrepancy in market valuation, arguing that Amazon's arguably superior chip business is not being similarly rewarded by the market.
Reasoning: Azure did not exhibit the same level of acceleration in growth as AWS and Google Cloud, only gaining $5.1 billion in annual recurring revenue this quarter. Daniel suggests this is why Microsoft stock did not respond well after its earnings report.
Reasoning: Google Cloud demonstrated exceptionally strong year-over-year revenue growth of 63%, which Daniel identifies as the main reason why Google stock saw significant buying after its earnings report. While AWS had comparable net revenue added, Google Cloud's growth came from a smaller base, making the percentage gain appear more dramatic.