Amazon (AMZN -1.64%), the e-commerce giant, has seen its stock price fall by more than 40% from its all-time high in mid-2021.
Bargain hunters are sniffing around for potential bargain purchases. But before making any move, they should know these two essential things that intelligent investors know about Amazon.
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1. The origins of Amazon's economic machine
Amazon has been a significant success over the last two decades. It went from operating an online bookstore to becoming a global e-commerce giant with a diversified business in various industries.
Launched as an online bookstore in 1995, Amazon quickly expanded its product offerings to include a wide range of items. And thanks to its low-price strategy, it gradually became the go-to destination for online shopping. But it didn't stop there. The tech company introduced Amazon Marketplace, allowing third-party sellers to reach customers through the platform. This move significantly increased the selection of products available to customers and solidified Amazon's competitive position as a comprehensive online retail destination.
To further delight customers, Amazon launched Amazon Prime in 2005. This subscription service offered customers free two-day shipping on eligible products. The idea was to provide subscribers with free and fast delivery -- turns out they love it. Prime membership has since become a significant driver of customer loyalty, incentivizing repeat purchases and contributing to the growth of Amazon's ecosystem. Over time, Prime added other benefits, such as access to streaming services like Prime Video and Prime Music, becoming even more valuable to subscribers.
Another significant move Amazon made was to launch its cloud computing business -- Amazon Web Services (AWS) -- in 2006. As the first mover, AWS quickly became the preferred service provider for companies wanting to benefit from cloud computing. Over time, AWS added new features to its platform, making its services increasingly indispensable to its customers.
Amazon's relentless focus on innovation and customer delight has resulted in a diversified business model with multiple income streams. Out of the $127 billion in revenue in the first quarter of 2023, 40% came from online sales, 23% from third-party seller fees, 17% from AWS, 8% from subscription fees, 8% from advertising services, and the remaining amount from other services.
2. Amazon's prospects in the next few years
Amazon's track record of growth has been nothing but incredible. From just $511,000 in 1995, Amazon grew its revenue to $514 billion in 2022. In the last decade alone, revenue was up by more than eight-fold.
While Amazon is unlikely to grow at its historical pace in the future, thanks to its already giant size, there is potential for the company to expand further.
Let's first look at the e-commerce business. Amazon is the clear leader in the U.S., with around 38% of the e-commerce market share as of June 2022. While it doesn't have that much room to expand its e-commerce share, it is important to note that e-commerce only accounts for around 15% of total retail sales. So effectively, Amazon's retail market share is less than 6%, giving it plenty of room to grow.
Beyond that, Amazon can grow its e-commerce business in overseas markets, some of which have even lower e-commerce penetration rates. For example, Amazon is investing heavily in India -- a massive country with 1.4 billion people, a low e-commerce penetration rate, and a growing per-capita gross domestic product.
Another huge area for growth is cloud computing. According to Market.us, global cloud computing was worth $546 billion in 2022 and could reach $2.3 billion by 2032. AWS generated $80 billion in revenue in 2022, giving it plenty of room to ride this tailwind in the next decade.
Amazon can also count on its small but fast-growing advertising business to account for a more significant share of the group's revenue. In the first quarter of 2023, this segment grew 23%, while groupwide revenue grew by just 11%. Beyond that, the conglomerate can depend on its innovation engine to introduce new products and services in robotics, autonomous vehicles, and artificial intelligence.
Long story short: Amazon's growth machine will likely keep going for a while.
What this means for investors
Amazon is one of the most remarkable companies of our time. From a small online bookstore, it has become the top dog in multiple industries, including e-commerce and cloud computing.
While Amazon's historical growth pace may not continue, it still has plenty of room to expand its e-commerce business locally and in overseas markets and ride the tailwind of cloud computing growth. Investors should keep the company on their radar.
