The Nasdaq Composite nosedived into a bear market more than a year ago, taking good stocks like Amazon (AMZN 0.80%) down with it. The drawdown was caused by recession fears surrounding high inflation and rising interest rates, but there is a silver lining for patient investors. Amazon is well positioned to rebound when economic conditions improve and the next bull market roars to life.
Here are four reasons this FAANG stock is worth buying now.
1. Amazon is a leader in e-commerce
Brand Finance recognized Amazon as the most valuable brand in the world in 2023. That distinction highlights the tremendous popularity its marketplace enjoys among consumers. Indeed, Amazon draws more visitors each month than any other digital shopping destination, and it accounted for 38% of online retail sales in North America and Western Europe last year. Its Prime membership program creates even more value for consumers, and its massive logistics network adds value for merchants, accelerating the network effects inherent to its business model.
Looking ahead, Ameco Research estimates that global e-commerce sales will grow at 13.6% annually to reach $15 trillion by 2030. Amazon is exceptionally well positioned to benefit from that trend.
2. Amazon is a leader in cloud computing
Amazon Web Services (AWS) was the first hyperscale public cloud, and it still dominates the market for cloud infrastructure and platform services (CIPS). AWS accounted for 32% of CIPS spending in the fourth quarter last year, putting it nine percentage points ahead of the runner-up Microsoft Azure. That leadership is built on a tremendous capacity for innovation. According to research company Gartner, AWS offers the broadest and deepest set of CIPS capabilities of any vendor. That advantage should keep it on the cutting edge of cloud computing technology for years to come.
Looking ahead, Grand View Research estimates that cloud computing spend will grow at 14.1% annually to reach $1.6 trillion by 2030. Better yet, cloud computing comes with much higher margins than retail. AWS reported an operating margin of 28.5% over the last 12 months, but its retail operating margin was negative due to headwinds from high inflation. That means Amazon should become more profitable as cloud services account for a larger portion of its total revenue.
3. Amazon is gaining market share in digital advertising
Amazon has a booming ad tech business built on the popularity of its e-commerce marketplace and streaming platform. In fact, Amazon was the fourth-largest digital advertiser in the world last year, and it's gaining ground on the industry leaders, Alphabet's Google and Meta Platforms. In fact, Amazon increased its ad revenue by 19% in the fourth quarter of last year, while Google and Meta Platforms both saw ad revenue decline by 4%.
Looking forward, Grand View Research says ad tech spend will grow at 13.7% annually to reach $2.4 trillion by 2030. Like cloud computing, digital advertising comes with higher margins than retail, meaning Amazon should become increasingly profitable as its ad tech business accounts for a larger portion of total revenue.
4. Amazon stock trades at a discount to its historical valuation
Shares of Amazon currently trade at 2 times sales, a discount to the three-year average of 3.5 times sales. That price looks particularly attractive because Amazon has a strong competitive position in three markets forecasted to grow at roughly 14% annually through 2030. In other words, investors can reasonably expect Amazon to grow revenue in the mid-teens through the end of the decade.
As a caveat, inflation remains elevated and the U.S. economy may yet slip into a recession. That means Amazon could face significant headwinds in the near future, and those headwinds could drag its share price lower. Investors who buy this growth stock today should be prepared to hold it through volatility. But I believe that decision will produce market-beating returns over the next decade.
