Long-term investing is key to sustainable returns in the stock market, and few companies exemplify this better than Amazon (AMZN 0.81%) with its roughly 700% return over the past decade. That bull run would have turned $1,000 into a whopping $7,000 -- no small chunk of change.
And while Amazon is now a more mature and slower-growing company, it could still turbocharge a $1,000 investment as it pivots to alternate long-term growth drivers that could become more important than e-commerce.
The post-COVID slowdown
Amazon was one of the biggest winners during the worst of the COVID-19 pandemic. Sales surged 38% and 22% year over year, respectively, in 2020 and 2021 as people flocked to online shopping because of lockdowns and other restrictions. But now that the worst of the crisis is over, Amazon's e-commerce business faces a combination of difficult comparisons, high inflation, and overexpansion, which are wreaking havoc on its sales and margins.
Third-quarter North American e-commerce sales jumped 20% year over year to $78.8 billion, but segment operating income fell from $880 million to negative $412 million. International e-commerce performed even worse, with operating losses spiraling from $911 billion to $2.5 billion in the period. But while these are alarming numbers, investors look at Amazon's Q3 challenges with a long-term perspective.
Amazon e-commerce's fundamental advantages (scale, brand recognition, and network effects) remain intact. And most of the current challenges seem to be temporary. Margin-eroding inflation can be expected to cool due to Fed rate hike increases. The strengthening of the dollar (which powered the weakness in international e-commerce) also shouldn't be expected to last forever.
To boost efficiency, Amazon expects to scale back its fulfillment and transportation investments by $10 billion to better align its infrastructure with expected growth.
Focus on the new growth drivers
Amazon is rerouting the money saved on logistics investments to technology infrastructure to help its cloud computing business, Amazon Web Services (AWS), maintain its dominant position in the industry.
AWS commands a 33% share of the cloud services market. And like Amazon's e-commerce business, it enjoys a strong economic moat because of its scale (this can help reduce prices), brand recognition, and high switching costs for clients to change service providers.
Image source: Getty Images.
Amazon's deep pockets are another advantage. The continued investments into AWS can strengthen its existing moat while creating a new one through a technological lead. The company is expanding its scale through the launch of the AWS Middle East region in August, and in October it announced plans to roll out the service in Thailand.
AWS is already outperforming e-commerce, with sales jumping 27% year over year to $20.5 billion, while operating income increased 11% to $5.4 billion. Investors can expect this segment to continue contributing an outsized amount to Amazon's bottom line going forward.
A good value for your money?
For many investors, $1,000 is too much to risk on a high-flying speculative investment. But that's not what Amazon stock is today. After its 47% year-to-date decline, Amazon stock is fast approaching bargain territory. While the company's forward price-to-earnings ratio of 42 looks high right now, that's mainly because profits are expected to be low in the near term because of temporary challenges like operating inefficiency and high inflation.
At the end of the day, Amazon retains its rock-solid economic moat. And high-margin growth opportunities like cloud computing will help it bounce back from its current slump while diversifying its revenue streams. The stock could turn a $1,000 investment into significantly more over the long term.
