Inflation is a word all consumers have become familiar with over the last 12 months. Put simply, it defines a broad rise in the price of goods and services, and right now shoppers are feeling it at the grocery store, at the gas pump, and even at the car dealership.
The primary measure of inflation is the Consumer Price Index (CPI), which is released by the Bureau of Labor Statistics (BLS) once per month. It hit a 40-year high in June 2022 on an annualized basis, alarming economists and fueling the sell-off in the stock market.
It meant there was no end in sight for the U.S. Federal Reserve's campaign to raise interest rates, which is placing further cost pressures on household finances. But here we are seven months later and, thankfully, that June number appears to have been the peak.
The BLS just released the January figure and it came in at 6.4%, marking the seventh consecutive monthly decline.
Amazon could be a big winner as consumers recover
Consumers are on the front lines when it comes to inflation because they're highly sensitive to changes in the price of everyday items. Many of those consumers shop online not only for convenience, but because it's often where they find the best deals. Where do many of them turn? Amazon (AMZN -1.64%), the largest e-commerce retailer in the world.
The effects of inflation have been twofold on Amazon's retail business. First, it has experienced lesser demand as consumers cut back on their spending. The company generated $220 billion in online sales during 2022, which was a 1% decline compared to 2021.
Second, Amazon's cost of goods sold has jumped over the last 12 months, which impacted its profit margin. In fact, the company just reported its first annual net loss since 2014 -- although there were some unique circumstances surrounding an investment loss from Amazon's stake in electric vehicle maker Rivian Automotive.
Amazon's retail business as a whole -- which includes sales from online and physical stores, plus subscription services and advertising -- logged an operating loss of $10.5 billion in 2022.
Since those challenges came on the heels of soaring inflation, it stands to reason that the company's results will improve if inflation continues to trend down in 2023.
Investors still have plenty of reasons to own Amazon stock
One of the most attractive things about Amazon from an investment standpoint is its operational diversity. It's best known as an e-commerce company, but investors are constantly watching its cloud segment, Amazon Web Services (AWS).
Why? Because it has been the profitability engine for the entire company despite accounting for just 15.5% of its total revenue. AWS delivered a whopping $22.8 billion in operating income in 2022, more than offsetting the operating loss in the retail segment. Cloud services are highly scalable, so AWS is able to carry a much higher gross profit margin than the rest of Amazon's business.
The cloud is the cornerstone technology for the new-age corporate world that is constantly shifting online. AWS is the industry leader, offering hundreds of services and solutions whether a business requires simple data storage or more complex capabilities like video streaming, and even artificial intelligence and machine learning.
According to one estimate by Grand View Research, the cloud sector could expand from roughly $484 billion in value in 2022, to become a $1.5 trillion yearly opportunity by 2030. That's a compound annual growth rate of 15.7%. However, over the last five years, AWS has grown its revenue at a compound annual rate of 35.7% to $80.1 billion in 2022.
That implies Amazon's market share is consistently increasing.
Amazon stock is a great value right now
Amid the inflationary environment and the broader sell-off in the technology sector, Amazon stock has plunged 46% from its all-time high.
Since the company wasn't profitable in 2022, one way investors can determine the value of Amazon stock is by looking at its price to sales (P/S) ratio. That is simply the company's market capitalization -- currently $1.02 trillion -- divided by its $513 billion in 2022 revenue.
Amazon's P/S ratio is therefore 1.98. Since the company's revenue has continued to grow overall while its stock price has fallen at the very same time, its P/S ratio is near its cheapest level in nine years, and it's down 57% from the heights of 4.66 it reached in 2020.
That seems like a great opportunity for investors given the current downtrend in inflation, which could reignite Amazon's e-commerce business in the coming 12 months. That's not to mention the enormous cloud computing opportunity ahead in the remainder of this decade (and beyond).
