While it can be tempting to buy and sell stocks quickly, long-term investing is the key to sustainable returns in the market. This strategy helps investors avoid stock price volatility while giving time for good companies to reach their full potential. Let's explore three reasons why Amazon (AMZN 1.30%) could overcome its near-term challenges and become a great long-term bet.
1. The business is cyclical
While Amazon's stock has recovered somewhat in 2023, shares are still down by 37% compared to an all-time high of $186 reached in late 2021. Back then, investors made many assumptions about the company that are no longer in play. For example, many believed that pandemic-era growth trends would continue, and challenges like inflation and rising rates would not be as damaging to consumer purchasing power as they turned out to be.
Overall, people seemed to have forgotten that Amazon is cyclical -- its business performance generally tracks the economic cycle of expansion and recession. When the economy is strong, customers spend more money on its e-commerce platform, while clients are more willing to undertake costs associated with transitioning to AWS cloud services. But when the economy is weak, these dynamics reverse.
If over 100 years of U.S. financial history is anything to go by, contractions are followed by even bigger expansions. And Amazon is positioning itself to ride the next wave up by winding down unprofitable business divisions (such as robotics and retail) and reducing staff redundancies by laying off 27,000 workers so far in 2023.
First-quarter net income increased from a year-ago loss of $3.84 billion to a profit of $3.17 billion. And the cost-cutting will help support this positive trend.
2. AI could be a new growth driver
One special thing about Amazon is how it has been able to constantly reinvent itself and diversify its revenue streams by branching into new opportunities. First, it was an online bookstore, then a generalized e-commerce marketplace, and now a diversified cloud computing leader. The company's massive scale gives it an edge in new industries. And it still has some relatively untapped opportunities to explore.
Right now, artificial intelligence (AI) could be the next big gamble. And while it is a crowded field, Amazon's huge user base (both retail and cloud computing clients) gives it an economic moat that rivals will struggle to beat.
Image source: Getty Images.
In April, the company announced Bedrock, a suite of new tools designed to help its Amazon Web Services (AWS) clients build customizable generative AI platforms without having to go through the cost and complexity of training one from the ground up. With this project, Amazon can take advantage of its scale and consumer relationships to become a "one-stop shop" for a variety of enterprise technology needs.
Management is also targeting the consumer side of the AI market with plans to implement a ChatGPT-style chatbot into its online marketplace. The goal will be to help users find answers to questions, compare products and receive product suggestions.
3. Don't forget advertising
Amazon's new growth drivers aren't just limited to AI technology. The company has also taken advantage of its e-commerce platform's scale and popularity to become a key player in digital advertising. This business includes paid promotion on its marketplace, featured items, and other ways of leveraging its shopping-motivated user base.
In the first quarter, advertising revenue grew 21% to $9.51 billion. While this is still a minor part of total revenue ($127.36 billion in the period), the healthy growth rate means it will become an increasingly important source of growth and diversification.
In between advertising, AI, and a resilient economic moat, Amazon looks poised to bounce back from near-term challenges stronger than before, and its stock price could soon follow.
