E-commerce and cloud-computing giant Amazon (AMZN -2.33%) is one of my favorite businesses. The company's diversified business model, strong brand recognition, and robust financial profile make it a no-brainer choice for growth investors.
For most of the last year, the majority of chatter surrounding Amazon has revolved around artificial intelligence (AI). And while I acknowledge the company is making some savvy moves in the AI realm, I have a prediction for something else that Amazon may have up its sleeve.
Let's dig in.
Amazon is a cash-flow machine
Amazon generates revenue from several sources. According to the company's filings, Amazon reports revenue into the following categories: online stores, physical stores, third-party seller services, advertising, subscriptions, cloud computing, and other services.
The majority of Amazon's operating income comes from its cloud services, Amazon Web Services (AWS). This isn't entirely surprising. While e-commerce and retail are the biggest revenue drivers, profitability margins in these segments can fluctuate dramatically in any given quarter.
Nevertheless, a close look at Amazon's financial statements reveals just how profitable the overall business really is. For the quarter ended March 31, Amazon reported $15.3 billion in operating income -- an increase of 219% year over year.
Moreover, free cash flow has ballooned to $50 billion on a trailing-12-month basis, while operating cash flow has soared 82% over the same time period -- reaching $99.1 billion.
Image source: Getty Images.
What could Amazon use its cash for?
Throughout 2024, investors have gained some insight into how Amazon is deploying its cash. After completing a $4 billion investment into AI start-up Anthropic, Amazon swiftly announced another initiative -- an $11 billion infrastructure project to build data centers in Indiana.
Obviously, these investments carry a hefty price tag. But all things considered, neither of them even puts a dent in Amazon's staggering cash pile, which currently sits at roughly $85 billion. Although this is a rather bold prediction, I think Amazon will begin using its excess profits to more directly reward shareholders in the form of a dividend.
Not only does Amazon have the financial horsepower to pay a dividend, but peers including Alphabet and Meta Platforms both initiated their own dividends earlier this year. Furthermore, "Magnificent Seven" peer Nvidia recently raised its dividend by 150% as noted during the company's latest-earnings report.
The bottom line
As of now, only Amazon and Tesla remain as the two Magnificent Seven members that do not pay a dividend. On top of that, many of Amazon's megacap peers also compete in the AI world and offer leading cloud-computing alternatives. Since they also pay a dividend, Amazon may not seem as enticing for big tech investors.
At the end of the day, I cannot say if or when Amazon could initiate a dividend. However, considering the company's mammoth heaps of cash and strong tailwinds across many different growth markets, I think its management should be considering the prospects of a dividend given how feasible it is from a financial perspective.
With all of this said, I'd caution investors from buying Amazon shares on speculation that it could one day become a dividend stock. As explored above, the company's diversified business and massively profitable operation are more concrete reasons to scoop up shares in Amazon and hold on for the long haul.
