In its first-quarter earnings announcement last week, Amazon (AMZN +1.22%) delivered a better-than-expected revenue number. The stock fell after the report came out, but then it rebounded. As of June 2, it has increased by 45% in 2023. Investors might be ready to consider adding shares to their portfolios, particularly given that it's still a dominant business with its fingers in multiple industries that are benefiting from powerful secular tailwinds.
So, is this FAANG stock a buy right now?
NASDAQ: AMZN
Key Data Points
Multiple growth drivers
Amazon is well-known for its lead in e-commerce. According to Statista, it has a 38% share of online retail shopping in the U.S., well ahead of its closest rival, Walmart. And considering the huge advantage its logistics and distribution capabilities give it, it's difficult to see Amazon giving up the top spot any time soon.
In 2022, roughly 84% of the company's net revenue came from non-cloud operations. Some of that $444 billion includes subscription sales, but that was still a massive dollar sum coming from e-commerce. But because online shopping represents just 15% of overall retail spending domestically, Amazon still has a sizable runway to grow its e-commerce revenues.
With a 32% share of the cloud infrastructure industry, Amazon Web Services (AWS) is another leading market offering that is benefiting from the shift of IT spending from on-site systems to an on-demand cloud environment. To be clear, the growth of AWS has slowed -- its revenue rose by just 16% in Q1 2023. But this can be blamed on the weaker macroeconomic environment. The long-term trend remains intact: Grand View Research projects that the cloud market will grow at a 14.1% compound annual rate between 2023 and the end of this decade to hit almost $1.6 trillion in 2030.
Because AWS carries an impressive operating margin of 28% (in 2022), it drives the profits for Amazon. Consequently, as a greater share of its revenue comes from AWS, the company's bottom line will expand notably.
One under-the-radar segment where Amazon is seeing huge gains is its digital ads business -- sales jumped 23% during the most recent quarter. Over the trailing 12-month period, this segment brought in $39.4 billion in revenue, making it a formidable competitor in the space. Amazon is one of the most popular websites in the world, so it's not a surprise that advertising would become an important revenue driver as management capitalizes on this traffic.
Pushing into artificial intelligence
There hasn't been a hotter topic over the past several months than artificial intelligence (AI). With the possibility that it could disrupt a wide range of industries, AI is certainly getting a lot of investor attention, and lots of start-up capital is going to the space. But Amazon shareholders can relax: The tech giant isn't resting on its laurels.
Within AWS, it launched a product called Bedrock that will allow AWS customers to develop generative AI applications. Generative AI tools such as OpenAI's popular ChatGPT respond to basic prompts to create text, images, and audio. By giving its customers the ability to create these apps, AWS is poised to usher in greater adoption of this powerful technology, while also making itself even more critical as an infrastructure provider.
When it comes to AI, Amazon hasn't gotten the attention that big tech rivals like Microsoft and Alphabet have, but there's no question that it is making strategic moves with the new technology that should benefit it over the long term.
Amazon's valuation isn't too demanding
As of this writing, Amazon shares are down 34% from their 2021 all-time high. A multitude of factors, ranging from higher interest rates, softer macro conditions, and a general shift away from tech stocks, have certainly helped drive Amazon's stock price lower. But it has bounced back this year as investors have been warming up to the big tech companies again.
Shares are currently trading hands at a price-to-sales ratio of 2.4, significantly below their 10-year average valuation. That looks like an attractive entry point.
Taking into account the fact that Amazon is already so dominant, has various growth engines, is focused on AI initiatives, and is trading at a reasonable valuation, buying the stock today seems like a no-brainer decision.
