FAANG stocks are a group of mostly technology stocks that have led the way for the market over the past decade. They are: Facebook (now known as Meta platforms), apple, Amazon (AMZN 0.29%)Netflix and Google (now known as Alphabet)
Although this cohort beat the market through 2022, it has not performed well since then. Part of the underperformance is due to high expectations and subsequent disappointment. But overvaluation was also linked to much of the decline. This has led to fantastic opportunities to buy some of the world’s best-run companies, as some of the stocks are at their cheapest in years.
If you’re looking for my top picks for the rest of 2023 (and beyond), read on.
Amazon’s gross margin has been steadily increasing
Being the cheapest stock doesn’t necessarily mean a dollar amount; instead, the cheap stock is one you can pick up for a low valuation. Of the group, Amazon consistently has the lowest rating due to its large asset-based e-commerce business. But recent business moves have reduced its reliance on trade.
Amazon is much more than the website you shop from. It has a massive advertising wing, third-party vendor services, and cloud computing (Amazon Web Services or AWS). All three businesses have much higher gross margins than typical online sales, thanks to the lower cost of goods, so Amazon is growing more like a technology company than a retail one.
This can be seen with Amazon’s gross margin.
AMZN Gross Profit Margin data (quarterly) from YCharts
These high-margin businesses are also Amazon’s fastest-growing, meaning they’re becoming a more important piece of the puzzle for Amazon.
| segment | Revenue (in billions) | Growth (YoY) |
|---|---|---|
| Online stores | 57.3 dollars | 7% |
| Physical stores | $5.0 | 6% |
| Services for Third Party Sellers | 34.3 dollars | 20% |
| Subscription services | $10.1 | 14% |
| Advertising services | $12.0 | 26% |
| AWS | 23.1 dollars | 12% |
| others | $1.2 | (3%) |
Data source: Amazon. YOY = year over year.
As Amazon’s gross margin grows, so does its potential to generate greater profits. The company’s third-quarter operating margin of 7.8% was nearly the highest the company has ever been.
However, none of this is reflected in the valuation that investors give Amazon.
The stock is valued as its old stock
Amazon is starting to regain profitability as it reported earnings per share (EPS) of $0.96 in Q3. But because Amazon’s earnings aren’t very consistent, valuing them based on trailing earnings is problematic.
From a price-to-sales perspective, its stock is near the same levels it traded at in 2016, when e-commerce (lower gross margins) was a much bigger part of the business. In 2016, Amazon’s gross margin was below 10%. Now at nearly 20%, Amazon has higher earnings potential, which should boost its valuation.
AMZN PS Ratio data from YCharts
Since the business is now producing higher margins, its valuation should be increasing, but it isn’t.
This is my bull case for Amazon, as CEO Andy Jassy has made it his primary mission to make Amazon more efficient. Rising margins will dramatically improve profits, making Amazon an attractive investment. While it will never reach the profitability levels of other FAANG stocks due to each company’s core business, improving earnings is a great sign.
Combine that with revenue growth at a market-beating 13% rate and an incredible free cash flow of $21.4 billion in Q3, Amazon looks like a top-tier investment.
Suzanne Frey, CEO of Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, a subsidiary of Amazon, is a member of The Motley Fool’s board of directors. Randy Zuckerberg, former Facebook CMO and spokesperson and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms and Netflix. The Motley Fool has a disclosure policy.