Amazon (AMZN 1.30%) has been an incredible stock to own over the past three decades. It soared at the beginning of the pandemic when demand was through the roof, but it's since come down as the company struggles with an enlarged infrastructure it no longer needs due to slowing demand. That's impacted the company with decelerating sales growth and falling operating income.
Despite that pessimistic opening, I'm going to spend the rest of this article telling you why you should buy Amazon stock. Actually, this may be an excellent time to buy, because the price is still down. But when a bull market comes back, Amazon stock is likely to soar. Here goes.
1. It's still the biggest, and growing
While e-commerce had been growing prior to the pandemic, it exploded when many retailers had to be online to sell products. Amazon benefited more than anyone else as the leading e-commerce retailer in the U.S.
All of the new Prime signups and the continued transition to e-commerce put Amazon in an excellent position to keep generating revenue and increase market share. Prime has more than 200 million members and growing, and Amazon continues to improve the service. It has expanded its Buy with Prime program, which allows third-party vendors to offer the option of buying through a Prime account on a separate website.
In Amazon's 2022 shareholder letter, which was released last week, CEO Andy Jassy explained that Amazon is renovating its distribution network to handle Prime deliveries faster and at a lower cost. He said that as orders soared, it became increasingly complicated and expensive to deliver products through its national fulfillment network, and management made a recent decision to shift to a regional fulfillment network. It now has eight interconnected regional centers that get more products to more customers faster. That has other benefits on top of saving money, including increased orders and happier customers.
2. It's ever the innovator
Perhaps the way Amazon stands out most from any other business in its class is its ever-expanding catalog of businesses. What began as a niche e-commerce bookseller has become a platform for almost every retail product type available, a major player in video and audio streaming (not to mention now owning a major film studio), and a leader in cloud computing services with Amazon Web Services (AWS). Then there are the many more products and services, such as hardware technology and a developing healthcare service business.
On the same day that Jassy released the shareholder letter, Amazon also announced a new artificial intelligence product for AWS called Bedrock. In true Amazon style, it's a buildable product that it's also planning to market to other companies.
Amazon isn't one to get left behind by new innovations, and it has used machine learning models for years in all sorts of ways -- from offering product recommendations based on a customer's search history to having the right products at the right warehouses based on regional preferences. It's taking all of that knowledge and creating its own generative AI applications.
This could have important implications for future technology, and as usual, Amazon is making itself an early leader in its creation.
3. It's focused on cost-cutting
Amazon's business exploded during the pandemic, and Jassy said it doubled its existing fulfillment network in two years whereas the first iteration had taken the previous 25 years to create. The newly decelerating demand requires less infrastructure, and Amazon has been working hard to wind down unnecessary investments and get back to strong profitability.
It's expecting lackluster growth in the 2023 first quarter of only about 5% over last year, after a 9% increase in fiscal 2022 and a net loss, its first in almost a decade. Operating income was only $12 billion for the full year, which was not only a nearly 50% cut from last year, but presents a minuscule operating margin on $514 billion in sales.
Management announced that it would eliminate 18,000 jobs, and it's pleased with its progress in fulfillment cost optimization. Transportation costs exceeded expectations in the fourth quarter, and related costs came down according to plans. As it winds down its higher cost structure, Amazon should enter a bull market as a leaner company with more resources to expand its businesses.
Amazon stock is down around 30% over the past year, but it's likely to climb back, making now a good time to buy.
