After suffering a perfect storm during the downturn, Amazon (AMZN 3.43%) returned to form over the past year. Improving economic conditions and the rapid adoption of artificial intelligence (AI) provided a boost for the stock, sending it up 84% over the past year -- more than triple the 27% gains of the S&P 500.
Many believe the Federal Reserve has engineered a soft landing -- when inflation is ultimately brought under control while the economy avoids a recession -- but the specter of strong pricing pressure remains.
What does this mean for investors who sat out Amazon's recent rally? Should they buy now in the hopes of additional gains or avoid the stock because of the economic uncertainty that lingers? Let's see what the evidence reveals.
Image source: Amazon.
Hit by double trouble
The market downturn of 2022 hit Amazon in two ways. First, consumer spending was pressured by persistent inflation, as dollars didn't go nearly as far. Furthermore, the pullback in consumer spending hit businesses, who, in turn, cut spending. These factors weighed on Amazon's consumer-facing e-commerce, as well as its business-centric cloud computing and digital advertising.
With the economy on the mend, each of Amazon's major business segments appear to be on the road to recovery. The evidence was clear when the company released its full-year 2023 results earlier this month. Net sales grew 12% year over year to $575 billion, while profit swung back into the black, with earnings per share of $2.90, compared with a loss per share of $0.27 in 2022.
The results were fueled by a record-breaking holiday quarter, aided by the regionalization of Amazon's U.S. fulfillment network. Amazon Web Services (AWS), the company's cloud infrastructure business, grew 13% last year, while its digital advertising grew 24%. At the same time, the company's digital sales edged 3% higher.
In the face of the ongoing recovery, Amazon still has robust growth drivers ahead.
Strong tailwinds
The future looks bright for Amazon's trio of major business segments.
Digital retail is expected to climb to $6.3 trillion in 2024, up 9.4%, according to Insider Intelligence. As the undisputed leader in e-commerce, Amazon is likely to nab more than its fair share of the business.
Traditional advertising is expected to return to growth this year, up 2.4%, compared with a 1.7% decline in 2023. At the same time, digital advertising spending is expected to climb 13.2%, according to Insider Intelligence. As the third largest digital ad platform, this benefits Amazon as well.
Last but certainly not least is cloud computing. The cloud infrastructure market is expected to experience the highest end-user spending growth among public cloud services, up 26.6% for the year, according to research and consulting firm Gartner. As the leading provider of cloud infrastructure services, with 31% of the market, Amazon will reap the rewards of these secular tailwinds.
Let's not forget the biggest potential growth driver of them all -- generative AI. The evolution of chatbots and the enhanced productivity they provide have businesses scrambling to grab their piece of the pie. The most effective channel to deliver AI to the masses is arguably cloud computing, because of its extensive reach among rank-and-file businesses.
AWS users have access to a suite of AI models via Bedrock, the company's AI platform, providing the building blocks to create AI applications of their own. Furthermore, it provides access to Nvidia's state-of-the-art GH200 Grace Hopper Superchips, as well as Amazon's own Inferentia and Trainium AI processors, helping customers strike a balance between computing power and economy.
The opportunity generative AI presents is conservatively estimated at $1.3 trillion, according to Bloomberg Intelligence, while some estimates are much higher. Amazon is positioned to reap the rewards of this secular tailwind.
How to approach Amazon stock now
Amazon is currently selling for roughly 2 times forward sales, which is remarkably cheap considering its prospects.
The company is the industry leader in both e-commerce and cloud computing and a strong contender in digital advertising. That, combined with the stock's inexpensive valuation, show why it's not too late to buy Amazon.
