Are you seeking a relatively safe way to invest in this uncertain economic environment? In that case, investing in one of the mega-cap FAANG stocks is an excellent idea, as they have the resources to weather any market downturn.
What is a FAANG stock? It is an acronym investors use to describe some of the most prominent companies in the tech sector. Originally the acronym was FANG for Facebook, Amazon (AMZN -2.56%), Netflix, and Google. The acronym became FAANG in 2017, when investors started including Apple.
One FAANG stock that captured many investors' attention lately is Amazon, which looks like it's turning the page from a tough year in 2022 by starting 2023 with a bang. The stock is up 31.26% year to date, beating the S&P 500 index returns of 7.41%.
Recently, the company released its first-quarter 2023 earnings report. Investors were initially pleased with the quarterly statement, which exceeded consensus analyst revenue and earnings estimates. However, one thing that disappointed investors was hearing that companies have been cutting back on cloud spending in the current challenging economic climate.
Given that cloud computing, its most profitable source of income, is currently struggling, can Amazon's stock crush the market in 2023? Read more to find out why the answer to that question is yes.
Investors should focus on the long term
Although Amazon Web Services (AWS) revenue growth may be affected by current economic concerns, technology experts still expect the cloud industry to experience long-term growth as more companies shift from on-site hosting to cloud-based applications. Amazon's CEO Andy Jassy confirmed that view on the latest earnings call when he said:
We've spent a fair bit of time analyzing what we're seeing, and I've spent a good chunk of time myself looking as well, and we like the fundamentals of what we're seeing in AWS. The new customer pipeline looks strong. The set of ongoing migrations of workloads to AWS is strong. The product innovation and delivery is rapid and compelling, and people sometimes forget that 90-plus percent of global IT spend is still on-premises.
It's challenging to imagine any company not utilizing the cloud in the future. Once OpenAI released ChatGPT, companies became interested in generative artificial intelligence (AI) and large language models. Most generative AI applications require a large amount of computing power, and the only affordable way for most companies to access such resources is through the cloud. Therefore, as generative AI spreads, it should benefit AWS' long-term revenue and profit growth.
Shareholders have more than AWS to be excited about, though. There are other parts of Amazon's business taking off.
Amazon Logistics is a competitive advantage
In a 2016 letter to shareholders, then CEO Jeff Bezos wrote: "Customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don't yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf."
Early on, Amazon identified one significant customer dissatisfaction in e-commerce: the consumer wanting their item now, not a week from now. So the company built a world-class logistics and fulfillment operation by working to solve this issue.
The company built its logistics up so rapidly that competitors could never quite catch up to the delivery speed, convenience, and lower costs of Amazon Prime. As a result, Amazon's delivery service became a competitive advantage.
For example, Shopify recently ended its big bet on establishing a logistics operation by divesting Shopify Fulfillment Network, likely because it had a hard time scaling the business to profitability and would also be too costly to attempt to match up to Amazon's logistical capabilities.
During Amazon's first-quarter earnings call, Jassy announced that Amazon Logistics had implemented a new structure. The company divided its national fulfillment network in the U.S. into eight interconnected regions, each with its own wide product selection. This change in structure enables shorter travel distances, resulting in lower costs to serve each customer and improved delivery speed to facilitate even more next-day and same-day deliveries.
Although it started its logistics operation to enhance its e-commerce operation, Amazon Logistics has already reached a scale to directly compete with UPS and FedEx. Tons of upside here!
Advertising is an up-and-coming segment
Although growth in the overall advertising industry declined in this economic downturn, Amazon advertising has continued to thrive and outpace the general ad industry and the most prominent online advertisers, Alphabet and Meta Platforms. Why are advertisers gravitating to Amazon? It's because Amazon ads target shoppers ready to buy right now, which is not necessarily the case with Google or Meta ads.
Today, Amazon's most popular ad formats are sponsored products, sponsored brands, and sponsored displays. But the best days are ahead for its ad segment, as the company is only beginning to actively strategize how to effectively incorporate advertisements into more of its diverse platforms, spanning video, live sports, audio, and grocery stores.
You can expect Amazon's advertising business to experience substantial growth in the long term, especially with the anticipated recovery of the advertising industry.
Should you buy the stock?
Amazon trades for 2.16 times trailing-12-month sales. However, the market valued the stock at a median of 3.02 times trailing-12-month sales over the last 10 years, suggesting the market is undervaluing the stock today.
If you're looking for a stock that offers compelling value, has multiple long-term growth drivers, and can survive should the market turn further south, there are few investments better than Amazon.
