AMZN is an attractive long-term investment; current discount due to high AI capex is overpriced by market fears, as AWS shift improves ROIC and margins.

I've been talking all year about wanting to increase my stake in Amazon shares, and I've been able to do so at an attractive price . I have doubled my stake in Amazon stock. It now constitutes about 6% of my total investment portfolio, which is what I was aiming for.

Remember when I gave you my last wallet update, Amazon was making up about 3% of it, and I said then that I wanted it to get closer to 6 to 8%. Since I doubled my stake, it now represents about 6% of my portfolio.

So , I wanted to share with you some of the reasons that prompted me to go ahead and buy Amazon stock, and why I wanted to add more to it throughout the year. Well, one of the reasons is of course the evaluation.

Amazon is a company I would classify as one of the world's "Hall of Fame" companies, and this type of company often does not trade at fair prices, and when it does, I feel it is an attractive investment for long-term investors .

When you can acquire a " Hall of Fame" company at a fair price, I believe it's an excellent opportunity for investors. Thus, with Amazon, I not only get it at a fair value, but I also get it at a discounted price .

I calculated its fair value for myself at $306 per share, while the current market price is $258, and I actually bought it at a price close to $250. Therefore, I expect an increase of approximately 20% over the next 12 to 18 months, plus it is a great company that I feel confident about holding onto in the long term by buying it at a discounted price.

Of course, the biggest reason why Amazon shares and a few other companies are trading at discounted prices is the massive increase in capital expenditures. I mean, I can't overemphasize how much capital expenditures have increased .

To the point that I estimate Amazon will generate a negative free cash flow of $40 billion this year . This means that after all the operating cash flows the company generates, which will approach $125 or perhaps $150 billion, the free cash flow will still be negative because they will spend more than $200 billion, and possibly $220 billion, on capital expenditures to build this AI infrastructure.

Therefore , you can buy discounted stocks like Amazon stock at prices lower than market prices because of the high risks associated with the potential return on capital invested in those investments, as market participants are concerned that Amazon's returns will not be sufficient to justify the cost.

But I think investors are very concerned about these risks. I'm not saying it's not a risk, but I think investors are over-concerned about it. My justification for this belief is that the business performance was really good.

The management team has been relatively effective in allocating capital. And that has been steadily improving. You can see the return on invested capital for Amazon. In 2017, it was around 8%, and recently it jumped to more than 22%. So, they were good at allocating capital.

Some of those investments they made, in fact, if we look at before 2023 or 2022, the bulk of those investments went towards the delivery network, warehouses, logistics, operations, cars, trucks, and aircraft.

All of this is to support e-commerce businesses . That was the bulk of the investments. If you look at what they have, you know, they have business assets that exceed hundreds of billions of dollars.

Looking prior to 2023, the vast majority of those assets were allocated to e-commerce businesses. Traditionally, their e-commerce businesses were less profitable, with operating profit margins of less than 10%.

Thus, the bulk of their assets were concentrated in a category that was generating operating profit margins of less than 10%.

Now, since 2023, the bulk of their asset investments, and the bulk of their capital expenditures, have gone towards the cloud services sector, AWS. This is a category that has historically achieved operating profit margins of over 30% and is recently approaching 40%.

So now you have a nearly balanced business given the amount they have spent in the AI and AWS sectors, and by the end of this year and next year, it is likely that more than 50%, and possibly even 60% or 75% of their total assets will be allocated to the AWS sector, which has historically been at least three times more profitable than e-commerce businesses .

Therefore, given that the bulk of its investments are directed towards a more profitable category, it is reasonable for me to assume that their profit margins and returns on invested capital will be better in this category of asset investments than they have historically been for Amazon.

These industry dynamics are driving the company's profitability, given that demand will outstrip supply over the next few years. These assets are intended for the next few years only.

These assets are not intended for the next 20, 30 or 40 years . About one-third of them are long-term; When thinking about a data center, the external structure and building are considered long-term assets.

This structure may last for 20, 30, 40 or even 50 years. As for the components within the data center, they are short-term assets that may need to be replaced within 4, 5, 6 or 7 years at most, if they manage to make the most of their computing components , which they have already succeeded in doing .

So, one-third of the assets are the structure, and two-thirds are the components. Thus, these assets are almost entirely booked for the next few years. Therefore, for the entire shelf life of these ingredients, they are fully reserved.

They already have customers waiting in line this year, next year, and the year after, to take advantage of what they are building. Then they are left with that structure which they benefit from, and which they can renew with newer components as per customer demand, while continuing to benefit from this size.

Therefore, I am reasonably confident that Amazon will achieve a return on capital invested in all of its AI investments over the past years that exceeds, and is significantly higher than, its weighted average cost of capital .

I am relatively confident of that based on some of the details I have shared with you here.

Even if you look at Amazon's valuation based on a forward price-to-earnings ratio of 25, it looks relatively cheap. So, the overall valuation of Amazon—which is more profitable than Walmart and Costco—seems very attractive to me.

So, for all these reasons and more, I wanted to own more Amazon shares, and I am grateful that I was able to increase and double my financial position in Amazon shares at these attractive valuations.