Amazon.com (AMZN -2.56%) has underperformed the S&P 500 in the recent market downturn, and by a significant margin. There are headwinds affecting both of its main business segments, and the level of uncertainty surrounding things like consumer spending and enterprise cloud spending is very high.
Having said that, Amazon's valuation has been nearly cut in half and sits just above $1 trillion as of this writing. But could Amazon rebound sharply this year and join the very exclusive $2 trillion club?
Why has Amazon's stock underperformed?
As my colleague Rich Duprey recently pointed out, Amazon became the first company ever to lose $1 trillion in market value in the current bear market. Even after a recent rebound, Amazon is still about 45% below its peak and just regained its $1 trillion valuation after coming rather close to the $2 trillion milestone a little over a year ago.
There are a few good reasons. Consumer spending has slowed down, especially on discretionary purchases, and margins in the retail side of Amazon's business have been under pressure as certain costs (like shipping) have been unpredictable. Plus, e-commerce spending has reverted to pre-pandemic levels after a surge in 2020 and 2021, leaving the company with excess fulfilment space. Amazon lost money through the first three quarters of 2022. And there are legitimate fears that sales could decline in 2023 if a recession hits.
Even the Amazon Web Services (AWS) side of the business, which is by far the faster growing of the two, is seeing its growth slow down as enterprise customers pump the brakes on cloud spending.
Future growth potential is massive
One important takeaway is that most of the headwinds facing Amazon are cyclical (temporary) as opposed to more troubling problems such as declining market share. The long-term growth catalysts for Amazon are still intact. E-commerce makes up just 15% of U.S. retail sales today, and (excluding the pandemic) this has been steadily rising for over a decade. Plus, Amazon's e-commerce presence has quite a bit of room to grow internationally, especially in places where e-commerce adoption is still in the earlier stages.
Plus, Amazon is still figuring out the best way to monetize its platform, especially when it comes to advertising. Ad revenue was an impressive $26.2 billion through the first three quarters of 2022, and in the third quarter, Amazon's ad revenue grew by 30% year-over-year, but on an annualized basis, the company still has a mid-single-digit share of the ad market. It wouldn't be a big surprise for Amazon to double its ad revenue in the next five years or so.
On the AWS side of the business, the cloud infrastructure market is expected to more than quadruple in size by 2030. So, even if Amazon can simply maintain its 32% global market share (by far the highest), this could be a major growth driver – and it's worth emphasizing that this is an extremely profitable business.
Finally, these are just the opportunities in Amazon's two existing main business segments. The company has tremendous potential in healthcare and is still trying to figure out where it fits in brick-and-mortar retail (where 85% of retail sales are), just to name a couple examples.
The bottom line
I'm very confident that Amazon will reach a $2 trillion valuation at some point within the next few years. In fact, I have said before that if I had to bet on what stock will be the world's first $5 trillion company, it would be Amazon.
Having said that, I'm not sure it's likely to happen in 2023. This would require Amazon to nearly double from its current stock price and reach a fresh all-time high. It's certainly possible, especially if the U.S. economy can completely avoid a recession, inflation is brought under control, and consumer spending is strong all year. But those are all very big "ifs." The point is that Amazon has some massive long-term growth catalysts and could be an excellent opportunity for patient long-term investors, but it's anybody's guess how the rest of 2023 will play out.
