After suffering through a brutal 2022, Amazon's (AMZN 0.58%) stock is finally showing some signs of life. Here's why even more gains could lie ahead for investors, including three smart reasons to buy the stock today.
1. AI is boosting demand for Amazon's cloud services
Although Amazon is best known for its e-commerce sites, cloud computing is the company's primary profit driver. Amazon Web Services (AWS) generated a whopping $22.8 billion in operating income in 2022, up from $18.5 billion in 2021. That was despite significant macroeconomic challenges, including inflation and recessions fears, that drove many businesses to slow their technology investments.
Inflation is moderating and the economy will eventually strengthen, both of which should increase Amazon's cloud profits. But AWS is set to enjoy an even more powerful growth catalyst in the coming years: artificial intelligence (AI).
Amazon's new service, Bedrock, is designed to help customers easily build and scale generative AI applications. Generative AI is cutting-edge technology made popular by apps like ChatGPT, which can produce text, images, and other novel content from user prompts. Bedrock provides access to AI models, including Amazon's new Titan models, as well as those offered by Stability AI, Anthropic, and other providers. Additionally, Amazon's custom-designed Trainium and Inferentia2 chips can reduce the cost of training AI models and running generative AI workloads on AWS, thereby making the technology accessible to more people.
Amazon already has over 100,000 customers for its AI services. Amazon management said it believes generative AI will have a "profound impact across industries" and power "a technological revolution that will continue for decades to come." Amazon intends to lead this revolution, and it's investing aggressively to advance this game-changing technology.
2. E-commerce trends are normalizing
Of course, Amazon also stands to benefit from the long-term growth of the online retail industry. Yet investors appear to be underestimating just how valuable this market could be, according to analysts at the investment firm run by JPMorgan Chase. The firm recently named Amazon its best internet stock idea.
Analyst Doug Anmuth acknowledged that macroeconomic issues are weighing on Amazon's results. But he expects e-commerce companies to return to their historical norm of wrestling away market share from brick-and-mortar retailers. He also sees Amazon's profit margins improving, due in part to its cost-cutting initiatives. All told, Anmuth sees Amazon's stock rising more than 30% to $135 per share.
As Anmuth noted, CEO Andy Jassy is working to cut expenses throughout Amazon's retail operations. Jassy's plan includes job cuts and a slower pace of expansion for the company's massive fulfillment network. While painful in the short term, these measures should make Amazon more efficient and, by extension, profitable.
In a letter to shareholders, Jassy noted that roughly 80% of global retail sales still occur in physical stores. That leaves plenty of room for growth for the e-commerce giant. And the additional sales Amazon earns should come with higher margins, thanks to its efficiency-boosting efforts.
3. Amazon has a multitrillion-dollar opportunity in robotics
Automation should further enhance Amazon's profitability. The robotics market could grow to a staggering $9 trillion by the end of the decade, up from $70 billion in 2022, according to Ark Investment Management. Amazon is also a powerhouse in this booming industry.
Ark notes that the adoption of industrial robots tends to accelerate during economic calamities, such as the 2002 dot-com crash and the 2008-2009 financial crisis. This somewhat counterintuitive trend is likely to persist. The reason is simple: automation can reduce labor costs.
Moreover, technological advancements are driving a rapid improvement in robot performance, so much so that Ark believes Amazon could begin to add more robots to its warehouses than people in the coming years.
So Amazon has an intriguing choice: sell its leading robot technology to other businesses or keep it in-house and enjoy the corresponding productivity gains. Either option should help to drive Amazon's profits higher in the decade ahead.
