Why Smart Investors Can’t Ignore the Allure of Amazon’s Flywheel Effect

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Analysts have 85 billion reasons to love Amazon stock (NASDAQ:AMZN). To be precise, 84,946,000,000 reasons.

That’s how much operating cashflow Amazon generated in 2024. It’s true that just $19.6 billion wound up as net cash flow, available for buying back stock or (gasp) dividends. Walmart (NYSE:WMT), by comparison, had $15.12 billion of net cash flow.

A value investor, using a discounted cash flow model, might say buy Walmart. A smart investor will buy Amazon. Tipranks figures there are at least 41 smart analysts out there. That’s how many analysts follow Amazon. It’s also how many are telling clients to buy it.

The Retail Flywheel

While Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), and Meta Platforms (NASDAQ:META) are backed by advertising, Microsoft (NASDAQ:MSFT) by software, and Apple (NASDAQ:AAPL) by hardware sales, Amazon is backed by its store.

Retailing delivers very fine margins compared to these other businesses. That’s why value analysts disparage it. A retailer selling for 68 times earnings, and six times product sales, seems absurd to them. But retailing is the flywheel that makes everything else at Amazon possible.

Retailing made Amazon’s cloud necessary. Amazon’s cloud, in turn, became something it could sell. So, too, with its fulfillment operations. This funded Amazon TV operations, and combined they make Prime a bargain, even at $13/month. Right now, 180 million households, three-quarters of the U.S., has a Prime membership. That’s how the flywheel accelerates.

Analysts now expect Amazon to earn $5.32/share in 2024. That’s on sales growth of 12%. This creates a forward price to earnings (PE) ratio of 34, competitive with the other Cloud Czars.

The Prime Flywheel

Like a Costco (NASDAQ:COST) membership, Prime membership is free money to Amazon. It’s a byproduct of the retail flywheel. So is advertising, which also flows into its services revenue. Services now represent 55% of Amazon revenue, that’s increasing, and it’s more profitable than product sales.

Health care is the ultimate services business, and Amazon’s entry is bound to frighten incumbents, thanks to the flywheel effect. But for $9/month, Prime members can now access telehealth and even some office visits. It’s one of several “bolt-ons” to Prime that Costco doesn’t have. These include the Kindle library, Amazon Music, and the ad-free version of Prime Video.

The marginal cost of adding new services to Prime is greatly exceeded by the value they add to the Prime bundle. It’s something trustbusters need to be careful of touching. If your aim is to give consumers a better deal, consolidated services are its very definition.

The Cloud Flywheel

The retail flywheel also launched Amazon’s Cloud flywheel, which in turn is creating an Artificial Intelligence (AI) flywheel.

Amazon stock is already using AI to improve its packaging and music recommendations. There are going to be mistakes, phony books and listings that leave consumers confused.

But learning from these mistakes, and correcting them, enhances Amazon AI. Laugh at Amazon’s no-checkout flop if you like, but it is teaching Amazon how to create a better experience for real stores’ consumers.

The Bottom Line

The key to Amazon’s success is that it resells everything it makes for itself. This is the heart of its flywheel.

The improvements this has made to our lives over the last 20 years feel invisible. Shopping is transformed. Entertainment is transformed. Living costs are cut, as are the costs of running a business.

Amazon’s flywheel has become an essential part of our lives. As it learns to harness AI, and re-sells that capability to others, the flywheel will continue spinning faster. That’s more money for Amazon, more disinflation for the economy, and a brighter future for everyone.

As of this writing, Dana Blankenhorn had a LONG position in AMZN, GOOGL, MSFT, COST, and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his free Substack newsletter.

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