Tengler: Our pick for the quarter is Amazon

Key Concepts

• Amazon (AMZN): The primary investment pick discussed, highlighted for its growth in AWS, consumer spending tailwinds, and underappreciated areas like its chip business (Trainium) and advertising revenue.
• AWS (Amazon Web Services): Amazon’s cloud computing division, experiencing rapid growth and driving overall company performance.
• Consumer Discretionary Spending: Spending on non-essential goods and services, expected to benefit from factors like tax refunds and the “One Big Beautiful Bill” Act.
• Trainium Chip: Amazon’s internally developed AI chip, experiencing significant demand and growth.
• Advertising Revenue: A rapidly growing segment of Amazon’s business, fueled by AI and the Rufus shopping agent.
• Valuation Metrics: Price-to-Sales ratio, Price-to-Cash Flow, and Price/Earnings to Growth (PEG) ratio used to assess Amazon’s investment potential.
• “One Big Beautiful Bill” Act: Refers to the Inflation Reduction Act, expected to provide economic stimulus through tax refunds and potential direct payments.

Amazon as a Q1 Investment Pick: A Deep Dive

Nancy Tengler, CEO and CIO of Laffer Tengler Investments, identifies Amazon (AMZN) as her top pick for the first quarter, despite a recent setback with a previous recommendation (Oracle, which fell 30% due to AI build-out concerns – though they have continued to add to their position). This decision is based on a confluence of factors demonstrating Amazon’s strong performance and future potential.

Q4 Earnings & AWS Growth

Amazon’s Q4 earnings significantly exceeded expectations, with earnings up 25% and revenues up 13%. Crucially, Amazon Web Services (AWS) experienced its fastest growth rate since 2022. Andy Jassy reported that AWS sales volume in October surpassed the entire Q3 total, indicating robust demand for cloud services. This growth is directly linked to the increasing adoption of Artificial Intelligence (AI) and the associated infrastructure build-out.

Consumer Spending & Economic Tailwinds

While acknowledging potential concerns about consumer spending, Tengler argues that several factors will drive continued spending in Q1. She points to a surprising trend: despite flatlining job growth, new business applications are skyrocketing. Furthermore, the benefits of the “One Big Beautiful Bill” Act (Inflation Reduction Act) are expected to materialize in Q1, delivering approximately $150 billion in tax refunds – exceeding last year’s figures – and potentially additional direct payments from the administration. Debt servicing as a percentage of disposable income remains within acceptable levels, supporting continued consumer expenditure. The holiday season also showed strength, with Buy Now, Pay Later reaching $20 billion in spending, against a total holiday spending of around $250 billion.

Rural Delivery Expansion & Strategic Necessity

Amazon’s commitment to invest $4 billion in expanding rural delivery is viewed as a strategic necessity, despite the inherent challenges and lower margins associated with serving sparsely populated areas. The company’s scale allows it to absorb some margin compression in this area while focusing on growth in more profitable segments like AWS and advertising. This expansion was partially driven by carriers like UPS and FedEx reducing their willingness to handle Amazon’s low-margin, high-volume rural deliveries.

Underappreciated Growth Drivers: Advertising & Trainium Chip

Beyond the well-known strengths of AWS and e-commerce, Tengler highlights two areas that are currently undervalued by the market: Amazon’s advertising business and its internally developed Trainium chip. Advertising revenue reached nearly $18 billion in the last quarter, driven by AI initiatives and the new Rufus shopping agent (currently in beta), which is boosting both Gross Merchandise Value (GMV) and ad revenue. The Trainium chip, designed for AI workloads, is experiencing a remarkable 150% quarter-over-quarter growth rate and is consistently oversubscribed, with capacity fully utilized as soon as it becomes available.

Valuation & Investment Rationale

Tengler believes Amazon’s current valuation is compelling. She notes that, surprisingly, Amazon is trading at an attractive Price-to-Sales ratio, is cheap on a Price-to-Cash Flow basis, and has a PEG ratio of 1x for 2027 earnings growth. With projected revenue growth of 10-13% and earnings growth in the low 20% range, Amazon appears to be significantly underestimated by the market. As stated by Tengler, “I never thought I would say this about Amazon, but on a relative price to sales ratio, it’s in our buy range.”

Logical Connections & Synthesis

The discussion flows logically from a review of recent earnings and AWS performance to an analysis of consumer spending trends and the impact of government policies. The conversation then pivots to less-discussed aspects of Amazon’s business – rural delivery, advertising, and the Trainium chip – demonstrating a comprehensive understanding of the company’s diverse revenue streams. The final segment focuses on valuation, providing a clear rationale for the investment recommendation.

The core takeaway is that Amazon is not simply an e-commerce giant but a diversified technology company with significant growth potential in cloud computing, advertising, and AI-driven hardware. The confluence of strong earnings, positive economic tailwinds, and underappreciated growth drivers makes Amazon a compelling investment opportunity for Q1.