Amazon (AMZN 1.30%) is off to a good start in 2023, with its share price up by 14% year to date. While the company's e-commerce and cloud computing segments are still under pressure from ongoing macroeconomic challenges, new business opportunities can help power the next leg of long-term growth.
Let's discuss three reasons Amazon stock could make an excellent long-term investment.
1. E-commerce and cloud computing are cyclical
Like many technology-related companies, Amazon struggled significantly in 2022 because of macroeconomic pressures somewhat outside management's control. Inflation hurt the e-commerce business by constricting consumer spending while increasing the cost of doing business. And the cloud computing segment, Amazon Web Services (AWS), had slower growth as clients switched to lower-tier services to save money amid the uncertain economy.
NASDAQ: AMZN
Key Data Points
The good news is that these challenges don't destroy Amazon's long-term thesis. As a cyclical company, investors should expect Amazon's performance to improve when macroeconomic conditions ease. That's because it still retains its competitive moats through economies of scale and network effects, which are the advantages a platform gains the more people use it. Amazon also has new growth drivers.
2. Digital advertising and healthcare
Amazon's competitive advantages in scale and network effects can help it expand into brand-new industries like digital advertising. The company's over 300 million-strong shopping-motivated user base allows it to seamlessly place ads within its experience and gain crucial insights into customer shopping data and other habits. The company also places ads within brick-and-mortar stores operated by its Whole Foods subsidiary. In the third quarter, Amazon's ad business surged 25% to $9.5 billion.
Meta Platforms and Alphabet's ad businesses are significantly larger, generating $27.2 billion and $54.4 billion in their corresponding periods. But with Alphabet's lagging growth rate of just 2.5% and Meta's decline of 3.7%, Amazon looks poised to rapidly catch up to its bigger rivals.
Image source: Getty Images.
Healthcare is another potential growth driver. Amazon's extensive logistics and fulfillment infrastructure make it well suited for the online pharmacy business. The company is also targeting telehealth through the planned acquisition of online primary care provider One Medical for $3.9 billion, pending regulatory approval. If finalized, the deal would give Amazon a toehold in the $23.8 billion U.S. telehealth market and help it continue diversifying its revenue streams.
3. Amazon's valuation might be better than it looks
Despite its strong long-term thesis, Amazon's third-quarter earnings left much to be desired. While net sales grew 15% year over year to $127.1 billion, the company's bottom line weakened substantially. Net income fell 9.3% to $2.9 billion because of challenges like inflation and strength in the U.S. dollar, which hurt the conversion rate of foreign-earned income.
With a forward price-to-earnings (P/E) ratio of 50, Amazon's stock is valued substantially higher than the S&P 500's average of just 21. But with e-commerce and cloud computing in a down cycle and new businesses like digital advertising and healthcare poised to power the next leg of long-term growth, Amazon's current earnings don't seem to reflect the company's potential. And Amazon stock looks like a buy.
