Amazon (AMZN -1.11%) is having a banner year thus far in 2023, riding the wave of improving economic conditions and the ongoing rebound among technology stocks. Shares of the e-commerce pioneer gained more than 38% so far this year, more than quadruple the 9% gains of the S&P 500. The results -- at least thus far -- are markedly different than its performance in 2022 when the stock lost half its value.
Slowing economic headwinds resulted in an incremental upturn in Amazon's various business interests. The company's better-than-expected first-quarter results showed that, while some concerns remain, the economy may have finally reached a bottom.
What are the implications for investors who sat out Amazon's recent rally? Should they buy now with the expectation of additional gains or avoid the stock because of the economic uncertainty that lingers? Let's take a look.
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What's been weighing on Amazon stock?
Plenty has been written about the surge in e-commerce and the rapid adoption of cloud computing during the pandemic. And when consumer and business activity returned to normal, it resulted in tough comps. That -- combined with the now faltering economy -- hit Amazon's business like a freight train, sending the company reeling. Consumers tightened discretionary spending to focus more on essentials, while businesses cut back on cloud spending and digital advertising, two of Amazon's high-growth businesses.
This paradigm was evident in Amazon's performance in 2022, as full-year revenue grew just 9%, down 59% from its impressive sales gains of 22% in 2021. Yet as seasoned investors know, this too shall pass. Prior downturns have taught us that once the economy begins to rebound, businesses and people alike open their wallets back up, and normal spending habits resume.
Make no mistake, even in the midst of the worst economic headwinds in more than a decade, Amazon retained its position as the world's largest digital retailer. While estimates vary, the company captured roughly 38% of the U.S. market and 13% of worldwide e-commerce.
This puts Amazon in a strong position to recover when consumer spending rebounds.
What could drive Amazon stock higher?
While e-commerce is Amazon's biggest revenue generator, there are other catalysts that could drive the stock higher.
The clear favorite is Amazon Web Services (AWS), its cloud computing operation. Despite rising competition, it continues to reign as the world's largest cloud infrastructure provider, commanding 32% of the market -- nearly as much as Microsoft Azure and Alphabet's Google cloud combined, according to data compiled by market analytics company Canalys.
AWS also continues to be Amazon's most lucrative venture, representing roughly 16% of its revenue in 2022, and all of its profits -- even to the point of subsidizing its e-commerce growth. Furthermore, the cloud infrastructure market is expected to grow at 30% annually over the next couple of years, according to forecasts provided by Gartner. This provides the company with a continuing runway for growth.
Amazon is also a rising star in the area of digital advertising, generating nearly $38 billion last year, an increase of 21% -- even as its biggest rivals struggled. Estimates suggest that Amazon now controls more than 7% of the worldwide digital advertising market, behind Google and Meta Platforms, with 29% and 11%, respectively.
There's also Amazon's renewed focus on artificial intelligence (AI). In a recent product debut, the company provided a few rare specifics, revealing that it sold more than 500 million Alexa-backed products and that Alexa usage increased 35% last year. Amazon also has no intention of ceding its lead in the AI device market, with plans to give its digital darling a much-needed makeover, adding more generative AI-powered experiences for Alexa over the coming year.
How to approach Amazon stock now
Amazon stock is currently selling for roughly 2 times trailing sales, near its cheapest valuation in eight years. That puts the stock squarely in bargain basement territory.
As illustrated above, Amazon is the undisputed industry leader in e-commerce and cloud computing, and it is a rising force in digital advertising. The ongoing opportunities in any or all of these secular growth areas could help fuel a stock rally in the months and years to come. To be clear, economic uncertainty remains, which could cloud the near term, resulting in additional volatility.
That said, seasoned investors who are well suited to withstand some volatility should consider buying Amazon stock now or adding to a existing position, especially in light of the company's history of strong growth and the vast opportunities ahead.
