While Amazon (AMZN -1.65%) is still down 18% over the last 12 months, investors have begun to regain optimism as the outlook improves. The diversified tech giant looks increasingly capable of overcoming near-term macroeconomic challenges and meeting its long-term potential. Let's dig deeper to see why its shares are a strong buy today.
The bottom line is beginning to rebound
Like many stay-at-home-focused companies that boomed during the worst of the COVID-19 pandemic, Amazon gave back much of its gains in 2022 as inflation and overexpansion gutted growth and margins in e-commerce and cloud computing. But the company's impressive first-quarter earnings suggest management is finally turning the ship around.
While a revenue growth rate of 9% year over year to $127.4 billion is nothing groundbreaking, the bottom line tells a different story. Operating income surged 30% to $4.77 billion, while net income improved from a loss of $3.84 billion to a gain of $3.17 billion. In previous quarters, CEO Andy Jassy expressed a commitment to making the business more efficient by scaling back unprofitable business ventures, streamlining Amazon's sprawling logistics network, and reducing staff.
Amazon laid off 18,000 employees between November 2022 and January 2023. In March, Amazon announced plans to lay off 9,000 more white-collar workers. If done properly, the belt-tightening could help profitability bounce back spectacularly when the macroeconomic situation improves.
Cloud remains a transformational opportunity
Amazon's cloud computing segment, Amazon Web Services (AWS), saw Q1 revenue increase 16% year over year while operating income dropped by 21% to $5.1 billion. The results highlight the margin pressure the industry faces as clients scale back their cloud spending in light of economic uncertainty.
In the near term, Amazon's management is leaning into this challenge by helping customers switch to lower-cost service tiers. While this move weakens margins now, it could help the company build lasting business relationships and protect its long-term market share. Over the longer term, management believes governments and businesses are at the early stages of cloud adoption, which could mean significant future growth is yet to come.
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Wall Street seems to agree. According to Morgan Stanley analyst Brian Nowak, Amazon's AWS might have a $2.5 trillion total addressable market that is still largely untapped. He also believes artificial intelligence (AI) could help boost growth. For its part, Amazon has released a suite of tools called Bedrock designed to help companies create and scale their own generative AI applications without having to build and train their own models from scratch. This could be the opening steps of a wider push into the opportunity.
Getting ready for the next bull run
The economy tends to move in cycles related to macroeconomic factors like inflation, consumer confidence, and interest rates. Right now, we are in a down cycle, which puts pressure on Amazon and many other companies. But investors shouldn't expect this to last forever. If over a century of history is anything to go by, these headwinds will eventually ease, and companies like Amazon could see operations normalize.
That said, the downturn has allowed management to streamline operations and potentially adopt new technologies like AI. It's possible that the company could bounce back stronger than ever.
