The rising interest rate environment has crushed valuations for growth stocks over the last year. Making matters worse, some rather concerning economic indicators on a few key fronts suggest that many businesses could face more challenging operating backdrops in the near term. As such, even some of the world's best companies are currently facing some intense pressures that have led to stark valuation pullbacks. 

But for investors, the current batch of macroeconomic storm clouds aren't without silver linings. Some incredible companies saw their share prices pushed down to levels that open the door for tremendous gains. If you're hunting for top growth stocks capable of delivering market-crushing long-term returns, read on for a look at one beaten-down category leader that currently offers a fantastic risk-reward profile for investors. 

A person receiving a package.

Image source: Getty Images.

Amazon is a great company that's under pressure

Amazon (AMZN 0.22%) has leading positions in the e-commerce and cloud-infrastructure services markets. It's also got a fast-growing digital-advertising business and an impressive penchant for innovation. It wouldn't be a stretch to say that it's been one of the most impressive and disruptive businesses of the last two decades. But the company's strengths haven't been enough to stop Amazon's share price from plummeting from its peak level. 

Amazon's share price has fallen 46% over the last year, and its stock is off 51% from its high. With guidance for sales to come in between $121 billion and $126 billion in the first quarter, management's midpoint target calls for year-over-year growth of just 6% in the period. Given that the company has managed go to grow revenue roughly 166% over the last five years and 703% over the last decade, it's little wonder that this growth drawdown dampened investor enthusiasm.

With operating costs soaring over the last year due to inflationary pressures on multiple fronts and some mistimed investments aimed at meeting pandemic-driven demand that's now dissipated, it's particularly easy to be down on the e-commerce business right now. But the crucial, profit-driving Amazon Web Services (AWS) cloud-infrastructure business is facing some growth deceleration and margin contraction as well. 

Metric

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Q4 2022

AWS year-over-year sales growth

39%

40%

37%

33%

28%

20%

AWS operating income margin

30.3%

29.8%

35.3%

29%

26.3%

24.3%

Data source: Amazon. Year-over-year sales growth based on currency-adjusted figures.

While the segment's operating income margin still looks fairly encouraging given that sales continue to grow at a solid clip, rising expenses are eating into overall profitability. Increases for energy costs and salaries for retaining top talent are tamping down on profits for the cloud business that's key for driving total bottom-line performance.

But while the company's core e-commerce and cloud businesses will likely continue to face pressures in the near term, investors shouldn't underestimate Amazon's long-term potential. 

Strong foundations and an attractive valuation profile

Like most businesses, AWS won't be immune to macroeconomic pressures. Alternatively, the long-term demand outlook for cloud infrastructure services remains very upbeat, and tougher economic conditions may actually encourage business customers to begin looking for new efficiencies offered by moving to the cloud and kick-starting digital-transformation initiatives. Such a trend might not be immediately apparent in the face of broader downturn, but it might be akin to planting seeds in winter that begin to flower when sunnier days return. 

Additionally, there are opportunities for the e-commerce business to become significantly more profitable over time. Advances in artificial intelligence, robotics, and autonomous vehicles have the potential to significantly improve warehouse and delivery efficiency, cutting down on key costs that have historically relegated the online retail business to low-margin territory. If so, the incredible scale of Amazon's e-commerce operations should really start to shine from a bottom-line perspective.

Amazon's dominant position in the online retail space is already giving it huge advantages in the digital advertising market, and there's a good chance that the company will be able to continue flexing these muscles in order to attract more high-margin ad spending. Last quarter, Amazon's digital advertising business managed to grow sales by 19% year over year despite a generally challenging industry backdrop. To put the industry climate in perspective, Alphabet and Meta Platforms are the top players in the space and saw their core ads-based businesses fall roughly 2% and 4%, respectively.

AMZN PS Ratio (Forward) Chart

AMZN PS Ratio (Forward) data by YCharts

Given its leadership positions in e-commerce and cloud computing, strong growth in digital ads, and an impressive record of innovation backed by an incredible breadth of resources, Amazon will likely remain one of the world's best companies through the next decade and beyond. With recent pressures pushing Amazon's price-to-sales ratios to levels that look low on a historical basis and suggest big upside potential even in the context of a growth slowdown, the stock stands out as a smart play right now.