In this article, we’re going to talk about the 8 best stocks to buy for beginners right now.
Where are Mega Caps Headed?
A few recent discussions have indicated that the markets may be entering a choppier phase. While the current trend appears strong and many stocks are participating positively, there are concerns about potential challenges if key players falter. Sentiment in the market seems overly bullish. This environment makes it difficult to maintain overbought conditions across various timeframes. Katie Stockton, Fairlead Strategies founder, recently appeared on CNBC to discuss her neutral stance regarding the current bull markets. We covered this discussion in much more detail in our article about the 7 Best American Stocks To Buy and Hold in 2024. Here’s an excerpt from that conversation:
“…She highlighted that sentiment appears overly bullish or greedy, as evidenced by the Fear and Greed Index reaching an extreme level of 5%. This situation makes it challenging for the market to sustain overbought conditions, which are prevalent across various timeframes.
Stockton anticipates a pullback or possibly a more significant corrective phase in the fourth quarter for the S&P 500, suggesting that this could mark the beginning of a range-bound environment. She pointed to indicators such as the VIX, which has entered a new higher volatility cycle, and mentioned signs of long-term exhaustion indicated by the DeMark indicators, levels not seen collectively since late 2021. While this does not necessarily signal an impending bear market, it does enhance the likelihood of experiencing a choppier trading environment.”
The overall focus should be on maintaining balance amid prevailing uncertainties in both equity and bond markets. As conditions evolve, investors are encouraged to stay informed and consider potential opportunities while navigating the changing landscape. On October 10 earlier, Malcolm Ethridge, Capital Area Planning Group managing partner, appeared on CNBC’s ‘Closing Bell’ to discuss markets, particularly mega-cap stocks and where they’re headed.
READ ALSO 7 Best Stocks to Buy For Long-Term and 8 Cheap Jim Cramer Stocks to Invest In
Stocks have risen by 60% since the start of the current bull market. As this bull market approaches its second anniversary on Saturday, Malcolm Ethridge was asked how long it might continue. He expressed optimism about the staying power of AI, noting that while last year’s focus was on Microsoft, this year’s spotlight is on NVIDIA. He emphasized the importance of identifying which stock will lead the AI arms race in the coming year, suggesting that the emphasis should be on growth potential rather than merely questioning if the market will continue to rise.
Ethridge conveyed his belief that mega-cap stocks will continue to drive market performance, although not at the same pace as in previous years. He pointed out that the broadening effect of AI is impacting various sectors such as materials and manufacturing, driven by increased demands on infrastructure.
When discussing the resilience of the two-year-old bull market, Ethridge highlighted that rising interest rates were initially expected to negatively impact market performance. However, despite facing historically high rates, the market has thrived. He noted that many leading companies, including some of the MAG7, have substantial cash reserves and are not reliant on borrowing to fund growth. This financial strength allows them to invest in AI technologies without being overly concerned about the Federal Reserve’s policies. Ethridge acknowledged that we are currently in an easing cycle with the Fed cutting rates. This environment enables companies that previously could not invest in growth to borrow and invest in AI, potentially fueling a second wave of the AI revolution.
The conversation then shifted to expectations regarding future Fed rate cuts. Ethridge suggested that investors should prepare for a slower pace of rate cuts than previously anticipated. While a 25 basis point cut may occur at the next meeting, he indicated that there could be a prolonged period of stability afterward rather than a rapid series of cuts. He also emphasized the need to reassess historical expectations regarding interest rates and market dynamics. The unique circumstances surrounding the COVID-19 pandemic have significantly altered traditional economic indicators and relationships. For instance, low unemployment alongside high interest rates has not historically coexisted without negatively impacting markets.
Ethridge concluded by discussing how elevated interest rates could affect stock valuations. He cautioned that if rates remain high, earnings must meet elevated expectations to justify current stock prices. This scenario raises questions about whether investors may need to recalibrate their expectations for future earnings growth in light of persistent inflationary pressures.
He highlights that established companies are likely to drive market performance, offering safer investment opportunities for newcomers. Ethridge’s observations about the resilience of the bull market, despite rising interest rates, suggest that stocks with strong fundamentals and cash reserves are well-positioned for growth. Additionally, his advice to maintain balance amid uncertainties encourages beginner investors to adopt a diversified strategy while focusing on long-term growth potential, helping them make informed decisions in a changing economic landscape. With that, we’re here with a list of the 8 best stocks to buy for beginners right now.
Methodology
We sifted through online rankings and internet lists to compile a list of the top 20 blue chip stocks. We then selected 8 mature companies with a 10-year revenue compound annual growth rate of at least 7% (high single digits to mid-teens is our definition of a mature and reliable grower), which were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024. The hedge fund data was sourced from Insider Monkey’s database which tracks the moves of over 900 elite money managers.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
8 Best Stocks To Buy For Beginners Right Now
8. Costco Wholesale Corporation (NASDAQ:COST)
10-Year Revenue CAGR: 8.49%
Number of Hedge Fund Holders: 71
Costco Wholesale Corporation (NASDAQ:COST) operates a chain of membership-only big-box warehouse club retail stores. It offers a wide variety of products at bulk prices, including groceries, electronics, and household goods among others. Members pay an annual fee to shop at here and enjoy exclusive discounts, savings, and services like pharmacy, optical, and auto programs.
This is one of the few companies that achieved $3 billion in sales within its first 6 years of operation. For the fourth quarter of fiscal 2024, it reported $79.7 billion in sales, a 0.96% increase year-over-year, and earned $5.15 per share. For the full fiscal 2024, it generated $249.6 billion in revenue, up 5%. Investors appreciate the company’s consistent growth. It plans to open 12 more locations by the end of 2024, reaching a total of 30 new locations this calendar year.
International sales grew by 5.7%, while e-commerce sales surged by 18.9%. Membership growth remained steady, with a 7.3% increase in paid household members and a 7% increase in cardholders. Renewal rates declined slightly due to a recent promotion but remained strong overall.
The company’s ancillary businesses and digital initiatives continue to drive growth. Pharmacy sales increased significantly due to higher prescription fills, while optical sales grew as more members took advantage of deals on frames and sunglasses. Gas sales were slightly negative due to lower prices but were partially offset by increased volume. Inflation remained relatively flat overall, with slight inflation in food and sundries offsetting deflation in non-foods. It lowered prices on some Kirkland Signature products while reducing packaging waste.
The company presents a compelling investment opportunity. Costco Wholesale Corporation’s (NASDAQ:COST) membership model, coupled with its competitive pricing and efficient supply chain, ensures a loyal customer base and strong growth potential.
Parnassus Core Equity Fund stated the following regarding Costco Wholesale Corporation (NASDAQ:COST) in its Q2 2024 investor letter:
“Costco Wholesale Corporation (NASDAQ:COST) posted strong results for the third quarter of fiscal 2024, with a robust increase in net sales and strength in both U.S. and international markets. Bucking the trend of weakening demand for discretionary items that has pressured many other retailers, Costco reported growth in nonfood sales.”
7. UnitedHealth Group Inc. (NYSE:UNH)
10-Year Revenue CAGR: 11.88%
Number of Hedge Fund Holders: 114
UnitedHealth Group Inc. (NYSE:UNH) is a multinational health insurance and services company that operates through 3 main segments: Optum, UnitedHealthcare, and Medicare Advantage. Optum focuses on health services, including pharmacy benefits management, health analytics, and health-based technologies. It offers a variety of commercial health insurance plans, as well as Medicare and Medicaid plans. Medicare Advantage is a program that offers additional benefits to Medicare beneficiaries.
The company just launched a new national gold card program aimed at reducing administrative burdens and improving care quality. This program will reduce the number of prior authorizations by 500,000 annually for qualified in-network providers.
AI is also playing a significant role in enhancing efficiency and improving patient care. Advanced practice clinicians are using AI to summarize patient histories, freeing up time for more direct patient care. Nurses are using GenAI to review documentation more efficiently, saving time and improving service. It’s also used to power consumer interactions and provider searches, allowing advocates to focus on more complex inquiries and improve the consumer experience.
In the third quarter of 2024, it made $100.82 billion in revenue, recording a 9.16% improvement as compared to the year-ago period. OptumRx revenues grew by $5 billion to over $34 billion driven by strength in the pharmacy care offerings, as well as growth in pharmacy benefits management from new customers and expanding specialty services. OptumInsight revenues were stable, approaching $5 billion and the ~$33 billion revenue backlog increased by more than $1 billion from last year.
UnitedHealth Group Inc. (NYSE:UNH) is well-positioned for continued growth. The company’s focus on quality, consumer value, and value-based care, combined with its innovative use of technology, makes it a strong investment choice in the healthcare sector.
Invesco Growth and Income Fund stated the following regarding UnitedHealth Group Incorporated (NYSE:UNH) in its Q2 2024 investor letter:
“UnitedHealth Group Incorporated (NYSE:UNH): Like many managed care providers, United Health has come under pressure from rising medical costs and higher-than-expected utilization. The stock is currently undervalued based on our analysis. We view the company as a high-quality compounder with secular growth opportunities in the managed care segment. The US Presidential election may cause additional near-term uncertainty, but we believe United Health will be able to rebound once pricing and utilization issues normalize.”
6. Mastercard Inc. (NYSE:MA)
10-Year Revenue CAGR: 11.50%
Number of Hedge Fund Holders: 142
Mastercard Inc. (NYSE:MA) is a payment card services corporation that offers a range of payment transaction processing and other related payment services. It operates a global payments network that connects consumers, merchants, and financial institutions. Its products and services include credit cards, debit cards, prepaid cards, and mobile payments. It also offers a range of services to financial institutions, such as processing payments, data analytics, and risk management.
The company has reorganized its structure into 3 key areas: Core Payments, Commercial and New Payment Flows, and Services. The company aims to capitalize on growth opportunities beyond traditional consumer card payments. In Q2 2024, it reported strong financial results with a revenue increase of 11.04%, driven by 7% growth in payment networks, and an 18% increase in value-added services and solutions. Healthy consumer spending and robust cross-border volume growth of 17% contributed to this positive performance.
Mastercard Inc. (NYSE:MA) controls 24% of the US credit card market. It expanded its travel partnerships in Q2, including a co-brand agreement with Ethiopian Airlines. It also signed multi-year contracts with Expedia and Wells Fargo to launch new co-brand cards with travel benefits. Switched transactions on the company’s network increased by 11% in Q2, down from 12% in Q1. It’s leveraging AI to enhance its services, particularly in fraud detection and cybersecurity.
The company is a strong investment choice. As a leading payments company with a proven track record, its diversified business model and innovative approach position it well to capitalize on the growing payments industry, using its well-known brands including Mastercard, Maestro, and Cirrus. Mastercard Inc.’s (NYSE:MA) continued focus on growth, coupled with its strong brand recognition and global presence, makes it a compelling investment option.
L1 Capital International Fund stated the following regarding Mastercard Incorporated (NYSE:MA) in its Q2 2024 investor letter:
“The share prices of Mastercard Incorporated (NYSE:MA) and Visa, both long term Fund investments, have both drifted down over recent months. There have been no dramatic developments, but there has been a general slight softening in the rate of growth of consumer spending in the U.S. and globally, a court decision rejecting Mastercard and Visa’s proposed settlement of a long-lasting dispute with U.S. merchants as well as other modest adverse regulatory developments. We continue to view Mastercard and Visa as two of the highest quality businesses in the world, and both are well placed to continue to deliver attractive, risk adjusted returns to shareholders over time.”
5. Visa Inc. (NYSE:V)
10-Year Revenue CAGR: 10.87%
Number of Hedge Fund Holders: 163
Visa Inc. (NYSE:V) provides payment solutions and operates a global payment network that connects consumers, merchants, and financial institutions. It offers credit cards, debit cards, prepaid cards, and mobile payments. among other products and services. It also provides services to financial institutions, such as payment processing, data analytics, and risk management.
This is the largest payment platform provider in the US, controlling 52% of the market by purchase volume and 47% by outstanding balances. The health of the credit card market is crucial to Visa Inc.’s (NYSE:V) success. It powers the global economy, connecting 4 billion account holders to over 130 million merchants, 14,500 financial institutions, and governments across its markets.
In FQ3 2024, the company’s revenue improved 9.57% year-over-year. Global payments volume grew by 7%. It saw strong payment volume growth rates in most major regions including Latin America, CEMEA, and Europe ex UK. The company’s acquisition of Featurespace strengthens its fraud detection and risk-scoring capabilities. Recent expansions into Peru and Vietnam have added millions of new users. The new Commercial Solutions Hub aims to revolutionize the $145 trillion commercial payments market by providing a unified platform for businesses and financial institutions.
Its VTAP platform, launched in October, enables banks to issue tokenized fiat currencies on blockchain networks. This aims to bridge the gap between traditional finance and blockchain technology. Later, in the same month, it partnered with Analytics Partners to help retailers optimize their marketing budgets using AI-driven insights. This collaboration aims to improve retailers’ return on advertising spending through data-driven solutions.
The company’s strong position in the global payments market, combined with its impressive financial performance and growth potential, makes it a compelling investment opportunity. Its resilience, high-profit margins, and expansion into emerging markets position it well for continued success.
Aoris International Fund stated the following regarding Visa Inc. (NYSE:V) in its Q2 2024 investor letter:
“Visa Inc. (NYSE:V) operates the world’s largest payments network, which facilitates the movement of money between merchants, financial institutions, consumers, businesses, and governments.
The company is best known for enabling consumers to make debit and credit card payments. In the year to September 2023, 4.3 billion Visa cardholders made 213 billion transactions on its network, to a total value of US$12.1 trillion.
Compared to cash and cheques, which are still widely used around the world, Visa’s network is a more convenient, secure, and ubiquitous way for consumers to pay. Visa has invested to reduce friction and fraud in the payments experience, to the benefit of both merchants and consumers…” (Click here to read the full text)
4. Apple Inc. (NASDAQ:AAPL)
10-Year Revenue CAGR: 8.03%
Number of Hedge Fund Holders: 184
Apple Inc. (NASDAQ:AAPL) is a multinational technology company that designs, develops, manufactures, and sells consumer electronics, software, and online services. The most well-known products include the iPhone, iPad, Mac, Apple Watch, and AirPods. It also provides software, such as iOS, macOS, watchOS, and tvOS, as well as online services like the App Store, iTunes, Apple Music, and iCloud.
It operates on a geographic basis, with segments focused on the Americas, Europe, Greater China, Japan, and the Rest of Asia Pacific. It recently moved away from its traditional annual product upgrade cycle to allow for more frequent releases and fewer delays. But the growing range of products has made this approach impractical. So now the company is adopting a staggered release strategy, as demonstrated by the upcoming launch of Apple Intelligence on October 28 with iOS 18.1.
FQ3 2024 revenue increased by 4.87% year-over-year, driven by strong growth in services, which reached a record $24.2 billion, up 14% from a year-ago period. While iPhone revenue declined slightly to $39.3 billion, Mac and iPad sales grew by 2% and 24%, respectively. However, Huawei recently surpassed it as the leading smartphone brand in China.
The company has experienced a long-term decline in mobile carrier upgrade rates, particularly for postpaid plans. This indicates that consumers are keeping their devices for longer periods, possibly due to economic factors, satisfaction with current technology, or the lack of compelling new features in recent models.
However, Apple Intelligence could boost demand in the US market. Analysts are bullish on Apple Intelligence’s potential to drive a longer upgrade cycle. Overall, Apple Inc.’s (NASDAQ:AAPL) strong brand, innovative products, and expanding ecosystem position it well for continued growth.
Vltava Fund stated the following regarding Apple Inc. (NASDAQ:AAPL) in its Q3 2024 investor letter:
“You probably have not missed the news that Warren Buffett has already sold half the stock from his largest public markets investment, Apple Inc. (NASDAQ:AAPL). It was a phenomenal investment for Berkshire. Over the course of seven years or so, it brought a profit of well over USD 100 billion. Apple comprised a very large position within Berkshire’s public portfolio, and this was the reason we avoided Apple stock outright during that time. We considered our exposure to Apple through our holdings of Berkshire stock to be sufficient, and we ended up making a lot of money on it. There has been a great deal of speculation in the market about what Buffett’s sale of Apple signals regarding his view of the stock market. I think the reason for the sale is much simpler. Buffett probably considers Apple stock so expensive that he prefers to cash in at 20% less (after all, Berkshire must pay tax on its profits). He started selling in the first quarter of the year. When I was in Omaha for the general meeting in May, Buffett said he was still selling, and I expect he continued to do so in the third quarter. I have to say that, as a Berkshire shareholder, I am happy about the Apple sale. I think Berkshire’s management will find a better use for this money, as they always have in the past. It is quite likely that they already have a very specific idea about this. If that takes two or three years, it does not matter at all. This is not a race and, in the meantime, the risk of holding Berkshire Hathaway stock itself has been greatly reduced.”
3. Alphabet Inc. (NASDAQ:GOOGL)
10-Year Revenue CAGR: 18.36%
Number of Hedge Fund Holders: 216
Alphabet Inc. (NASDAQ:GOOGL) is the parent company of Google, a multinational technology company that specializes in Internet-related services and products. Google’s core products include search engines, cloud computing, advertising technologies, hardware, software, and other internet-based services. It also owns other companies, such as Waymo (self-driving cars), Verily (life sciences), and DeepMind (artificial intelligence).
Google Cloud’s revenue grew by 28.8% in Q2, surpassing $10 billion. This contributed to a 13.59% overall revenue growth for Alphabet Inc. (NASDAQ:GOOGL). Net income was $23.6 billion. Google’s ad revenue increased to $48.5 billion in Q2, accounting for nearly 60% of Alphabet Inc.’s (NASDAQ:GOOGL) sales. YouTube’s ad sales also grew to $8.7 billion. Both YouTube Ads and Google Cloud are projected to reach a $100 billion revenue run rate by the end of 2024.
AI infrastructure and GenAI tools have generated billions in revenue for Google. Over 2 million developers are now using these tools. Google dominates the search engine market with ~91.06% and plans to invest $50 billion in AI initiatives by the end of 2024. AI technologies are enhancing user engagement and advertising efficiency on platforms like YouTube and search.
This company is a promising investment option. Renowned investor Bill Ackman has invested over 20% of his portfolio in the company, and Wall Street analysts are predicting a 20% increase in its stock price within the next year. It remains a financial powerhouse with strong financials and positive analyst sentiment.
Patient Capital Opportunity Equity Strategy stated the following regarding Alphabet Inc. (NASDAQ:GOOGL) in its Q2 2024 investor letter:
“Alphabet Inc. (NASDAQ:GOOGL) was a top contributor in the second quarter, finally catching up to its peers in the Magnificent 7. The company gained 20.8% in the period following strong first quarter earnings, a new $70B repurchase program (3% of shares outstanding) and the initiation of a cash dividend ($0.20 per share; 0.42% yield). We continue to believe the market underappreciates Google’s exposure to AI with its Gemini model being integrated into search results, YouTube advertising and its cloud offering. We continue to think that the cloud players will be the AI winners in the long-term, with Google being well positioned to take advantage. While the company trades at 24x 2024 earnings, if you remove the money-losing and under-earning businesses, you realize that you are paying below a market multiple for the core Google business. We do not believe there are many other AI winners trading at such an attractive multiple.”
2. Microsoft Corp. (NASDAQ:MSFT)
10-Year Revenue CAGR: 10.94%
Number of Hedge Fund Holders: 279
Microsoft Corp. (NASDAQ:MSFT) develops, manufactures, licenses, supports, and sells computer software, consumer electronics, personal computers, and related services. The most well-known products include the Windows operating system, the Office productivity suite, the Xbox video game console, and the Surface line of laptops and tablets. It also provides cloud computing services through its Azure platform and develops software for servers and embedded systems.
Its Copilot software, an AI-powered productivity assistant, is gaining popularity. Microsoft 365 Copilot customer numbers grew over 60% sequentially in FQ4. With an Office 365 user base exceeding 400 million, its future in productivity tools looks promising. Placing Platform Limited (PPL) has partnered with Microsoft to enhance its specialty insurance trading platform. Through this collaboration, PPL will integrate Microsoft’s data and AI capabilities to create a more efficient and data-driven platform.
Overall, FQ4 2024 revenue was up 15.20% year-over-year. Microsoft Cloud led the way with a 21% increase in revenue. Individual Office sales grew 4%, and Dynamics ERP and CRM software sales increased 19%. Bing saw a 3% increase in usage. Azure revenue surged by 30%. Partnerships with Lumen Technologies and Palantir further solidify its AI leadership and cloud capabilities. The Azure OpenAI revenue grew 30% and the service has seen a 60% surge in customers, reaching 60,000 in the past quarter.
The company’s recent healthcare AI innovations offer a promising but risky investment opportunity. While there’s potential for high growth, the competitive and regulated market presents challenges. Overall, continued investment in AI and cloud infrastructure position it as a market leader.
Generation Investment Management Global Equity Strategy stated the following regarding Microsoft Corporation (NASDAQ:MSFT) in its Q2 2024 investor letter:
“Generative AI’s hunger for power has increased disproportionately with its intelligence. According to one estimate, OpenAI’s GPT-4 required 50 gigawatt hours (GWh) of electricity to train, much more than the 1.3 GWh needed for GPT-3.3 And then AI requires even more power when it is put to use (so called ‘inference’). Some of the latest trends worry us. Microsoft Corporation (NASDAQ:MSFT) appears to be slipping in its ESG goals, with its greenhouse gas emissions rising again last year, as it invests in becoming a big player in AI. It is struggling in particular to curb its Scope 3 emissions in the capital goods category – nowhere more so than in the activity associated with the construction of data centres: both the embedded carbon in construction materials like steel and cement, as well as the emissions from the manufacturing of hardware components such as semiconductors, servers and racks. Google’s emissions have risen by close to 50% in the past five years.
We feel it is worth dwelling on Microsoft for a few moments, since we suspect you will be hearing a lot more about the relationship between AI and sustainability in the coming months. The bottom line is that we continue to see Microsoft as a sustainability leader. In the case of Scope 2 emissions, the company covers 100% of its electricity use with purchases of renewable energy. Crucially, though, the majority of this green energy is directly sourced via power purchase agreements, which bring new renewable capacity to the grid. Microsoft is also committed to operating 24/7 on renewable power by 2030, a policy that will help bring energy storage onto the grid as well…” (Click here to read the full text)
1. Amazon.com Inc. (NASDAQ:AMZN)
10-Year Revenue CAGR: 22.14%
Number of Hedge Fund Holders: 308
Amazon.com Inc. (NASDAQ:AMZN) offers a selection of products, including books, electronics, groceries, and more as an e-commerce retailer. It also provides cloud computing services through Amazon Web Services (AWS), streaming services like Prime Video and Music, and other digital content. Additionally, It has ventures in logistics, advertising, and artificial intelligence.
AWS revenue for the company improved 18.8% in Q2 2024 on a year-over-year basis. The overall net revenue was also strong, jumping 10.12% year-over-year, fueled by a healthy $14.7 billion in operating income. It’s doubling down on AI. The company has invested $30.5 billion in AI this year and plans to increase spending further, reflecting the growing demand for both generative and non-generative AI.
The company recently partnered with Databricks in a 5-year deal to create a data warehouse startup that utilizes its Trainium AI processors. This collaboration aims to help businesses develop AI models faster and at lower costs by leveraging the power of Amazon’s custom AI chips. It also introduced a new Kindle device with a color display, the Kindle Colorsoft. This is a significant update as the company has been criticized for lacking a color e-reader. The Kindle Scribe now has AI features for summarizing notes, and the Kindle Paperwhite has been slimmed down while maintaining its long battery life.
Amazon.com Inc. (NASDAQ:AMZN) is investing heavily in AI, demonstrating its commitment to staying at the forefront of this rapidly evolving field. This focus on high-growth areas positions it for continued dominance in the e-commerce and technology landscape. Its diversified business model also positions it for continued success.
Alphyn Capital Management stated the following regarding Amazon.com, Inc. (NASDAQ:AMZN) in its Q3 2024 investor letter:
“Amazon.com, Inc.’s (NASDAQ:AMZN) continued growth is driven by its strong performance in AWS and advertising, which grew 19% and 20%, respectively. E-commerce growth moderated to 9.3%, likely due to softer consumer demand.
In previous letters, I mentioned how Amazon’s heavy investments in logistics and fulfillment suppressed margins for some time, but the company is now reaping the rewards of those earlier expenditures. European operations have been profitable for the second consecutive quarter, while North American operating margins have risen from pandemic lows to 5.3%. A key ongoing area of focus for Amazon has been reducing the “cost to serve”; this is beginning to show tangible benefits. In 2023, Amazon undertook a “regionalization” strategy, which divided the U.S. into eight distinct regions for fulfillment and transportation, with corresponding distribution centers in each. As I learned from an expert interview done by InPractise, “regionalization” has resulted in estimated shipping expenses dropping from $4.76 per unit to $4.50, and they are now approximately $4.26, with potential reductions of 2-3% annually. Interestingly, Amazon leaned on its third-party vendors (3P) to finance much of this strategy. It did so by requiring 3P vendors ship inventory to the multiple regional distribution centers, instead of to a single location as they used to do. Moreover, Amazon imposed penalties for failing to meet strict minimum and maximum quantities. In this way, Amazon used 3P inventory to expand its distribution capacity by around 24 million square feet, much of which it could use for its own 1P inventory. Clever strategy, but one wonders if this raises the risk of an eventual vendor backlash due to the added financial and logistical pressures on 3P sellers.
Like Alphabet, Amazon is investing heavily in its AWS infrastructure to support its growing AI business. In the first half of the year, the company spent $30.5 billion on capital expenditures, with plans to exceed that in the year’s second half. When questioned about this during the earnings call, CEO Andy Jassy emphasized that they are seeing significant demand for AI-related services, which he believes will become a “very large” business for Amazon.”
As we acknowledge the growth potential of Amazon.com Inc. (NASDAQ:AMZN), our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AMZN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
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