Amazon (NASDAQ:AMZN) just got added to the Dow Jones Industrial Average. Although it has been a long time since the benchmark index was solely an industrial barometer, AMZN stock is an integral part of the U.S. economy. And because the country’s gross domestic product is so much more than just industrial output, it is only right that the index reflects the current makeup of the economy.
AMZN stock will be the third most valuable in the 30-stock Dow behind Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) but it will be pretty much in the middle of the pack by price. So Amazon’s impact on the index’s direction will be muddled. The Dow is a price-weighted index rather than market cap-weighted like the S&P 500 and Nasdaq Composite. There is also a factor applied to any price change to determine what effect the movement has on the index.
So does Amazon’s inclusion make AMZN stock a buy? Let’s take a closer look to find out.
It doesn’t look good
A superficial glance at history will show that becoming part of the DJIA is a bad omen. Stocks that become a component typically underperform the index. Conversely, those kicked out of the Dow tend to beat it. That suggests that at least over the coming year this Magnificent Seven stock will underperform Walgreens Boots Alliance (NASDAQ:WBA), the stock that it replaced.
AMZN shares surged 87% over the last 12 months compared to a 40% decline by the pharmacy chain. If nothing else, WBA stock investors (sheepishly raises hand) will welcome the potential gains to come. And whatever slowdown, if any, Amazon experiences as a result of its inclusion, shareholders shouldn’t worry. It will likely be short-lived.
Scratch beneath the surface
Amazon is on a hot streak. It is the leading e-commerce destination and is the dominant cloud services provider. The company enacted cost-cutting measures over the past year that are benefiting operations today and boosting returns. The online retailer also turned from being a user of cash into a free cash flow (FCF) producer. It generated $36.8 billion in FCF over the past year versus outflows of $11.6 billion in 2022.
The company also invested heavily in artificial intelligence (AI) for the e-commerce platform and its Amazon Web Services (AWS) cloud computing business is beginning to pay off. It is spending up to $4 billion in generative AI chatbot company Anthropic to bolster AWS. The cloud business has lagged the expansion seen by Microsoft’s Azure and Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOG), NASDAQ:GOOGL) Google Cloud.
However, revenue growth rates, which had been falling steadily each quarter for the past two years, are now rising again as a result of AI. Amazon saw over 13% gains from AWS, even though that trailed well behind Azure and Google Cloud growth.
The exception that proves the rule
Like Microsoft, the e-commerce leader infused AI into all of its services. From product recommendations on its retail platform to helping AWS customers utilize AI to build their own brands, Amazon has become a leading AI stock.
This triumvirate of opportunity — e-commerce, AWS, and AI — sets AMZN stock apart from much of the competition. Sales are on the rise across the board, profits and margins are widening and it is still early innings of artificial intelligence. The trio of growth factors says you shouldn’t underestimate Amazon.
The so-called “Dow jinx” isn’t 100% accurate. Several stocks added to the index went on to outperform those they replaced. Amazon looks like it could be another exception to the rule and I’d say its stock is a buy.
On the date of publication, Rich Duprey held a LONG position in WBA stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
