4 Green Flags for Amazon's Future

Amazon's (AMZN 0.81%) stock has declined roughly 40% over the past two years. The e-commerce and cloud leader had been a top stock to own during the pandemic, which boosted its online sales and the usage of its cloud-based services, but it lost its luster in a post-pandemic world beset by macroeconomic headwinds.

Amazon still faces a tough uphill battle this year, but four green flags appeared in CEO Andy Jassy's annual shareholder letter on April 13. Let's review those positive developments and see if they could light a fire under Amazon stock.

Image source: Amazon.

1. AWS still has room to grow

The bears often argue that Amazon Web Services (AWS), the world's largest cloud infrastructure platform, will run out of room to grow as the market matures and its smaller competitors catch up. AWS's slowdown over the past year, which it largely attributed to higher interest rates and other macro headwinds for enterprise spending, seems to support that thesis.

Data source: Amazon. YOY = Year over year.

But in his shareholder letter, Jassy said even with an $85 billion annualized revenue run rate, AWS was "still early in its adoption curve." He noted that even though AWS faces "short-term headwinds" in the current macro environment, the "elasticity" of its cloud services -- which enables its clients to spend more during economic expansions and less during economic contractions -- would give it an edge against on-premise servers and data centers over the long term.

Those statements suggest AWS will weather the near-term challenges and eventually recover. That recovery will enable Amazon to keep subsidizing the growth of its lower-margin retail businesses with AWS's higher-margin revenue.

2. It's investing in generative AI technologies

Jassy also said generative artificial-intelligence technologies, which have been recently popularized by AI-powered chatbots like ChatGPT and text-to-image platforms like Midjourney, would be a "big deal" for the company, its customers, and its investors in the future. Jassy said Amazon had been investing heavily in large language models (LLMs), as well as the development of its own chips, Trainium and Inferentia, to accelerate the adoption of those technologies among its AWS customers.

In a separate announcement on the same day, Amazon unveiled Bedrock, a new application programming interface (API) that lets AWS users build their own customized chat bots and generative AI tools. Bedrock could widen Amazon's moat against its closest cloud competitor, Microsoft, which has already invested billions of dollars in ChatGPT's creator, OpenAI, and integrated its generative AI tools into its own Bing search engine and Azure cloud services.

3. Its advertising business will keep growing

Another potential growth engine is Amazon's oft-overlooked advertising business, which generated 8% of its sales in its latest quarter. Its ad sales have remained remarkably consistent over the past year, even as the broader advertising market was rattled by macro headwinds, because it mainly sells promoted listings and ads within its own marketplace. To increase their visibility in Amazon's crowded marketplace, third-party sellers generally have to buy some of those ads.

Data source: Amazon. Constant currency basis. YOY = year over year.

In his letter, Jassy said Amazon's ads were "uniquely effective for brands" because they leveraged its knowledge regarding individual shoppers to display ads that were "relevant to what customers are searching for." That usage of first-party data largely insulates Amazon from Apple's privacy-oriented iOS changes, which primarily target the usage of third-party data by ad-dependent companies such as Meta Platforms and Snap.

4. The grocery business is just getting started

Lastly, Jassy said that while he was "pleased with the size and growth" of its grocery business, which includes Whole Foods and its online Amazon Fresh marketplace, that market was still a "big growth opportunity for Amazon."

Over the long term, Jassy expects Amazon to continue to streamline Whole Foods' business while building a new "mass grocery format" that is "worth expanding broadly." In other words, Amazon could either build more Amazon Fresh grocery stores to sell a broader selection of cheaper products than Whole Foods, or it could acquire an existing supermarket chain that already serves that market of low- to middle-income shoppers.

Do these green flags make Amazon worth buying again?

Amazon's growth will probably remain sluggish over the next few quarters. But over the long term, it should continue to dominate the e-commerce and cloud markets -- and it still has plenty of room to expand in advertising and grocery sales.

As an Amazon investor, I believe these four green flags support the bullish long-term thesis for the stock. Investors who are willing to ride out the near-term macro headwinds could be well rewarded for picking up some shares of Amazon today.