Amazon (AMZN 1.19%) shares have been on an absolute tear, up 56% so far in 2023. This performance easily beats the Nasdaq Composite's 33% gain. This strong momentum through the first half of the year might encourage some investors to get familiar with this big tech superstar.
Is Amazon a good stock to buy right now, even though it's 30% below its all-time high? Here are three reasons I think it's a compelling investment opportunity.
Superior products and services
With a market capitalization of over $1.3 trillion and 2022 revenue of $514 billion, it's safe to say that Amazon is one of the most dominant businesses in the world. It got to this enviable position by creating and offering some of the most in-demand products and services on the market. In fact, I'm sure many consumers and businesses interact with Amazon daily. That's a powerful characteristic to have.
As an individual, I find myself being an Amazon customer multiple times a week. I might order something from the massive e-commerce site and get free next-day shipping thanks to my Prime membership. The program now counts over 200 million global subscribers. This Prime membership also gives me unlimited access to Prime Video, where I can watch a movie or a new season of a series over the weekend.
And when it's time to buy groceries for the week, I can visit the nearby Whole Foods, which Amazon purchased for $14 billion in 2017. The company also sells various hardware products, like the Kindle e-reader, Fire TV, and Echo smart speaker.
On the enterprise side, Amazon Web Services (AWS), the company's cloud-computing platform that is a leader in the industry with a one-third share of the market, is a mission-critical service for businesses of all sizes. AWS generated revenue and operating income of $80 billion and $23 billion, respectively, in 2022, both up double-digit percentages year over year.
The fact that Amazon is ingrained in the lives of its user base is an incredibly attractive trait from an investment perspective. It not only means the company is crushing its rivals in different areas, but it also increases the chances that Amazon will continue being a leader years from now.
NASDAQ: AMZN
Key Data Points
Strong growth potential
With such a massive revenue base already, it's hard to believe there could be much growth left for Amazon over the next decade. The law of large numbers could kick in, and eventually, the business might simply fully penetrate its existing opportunities and run out of new markets to enter. I'm sure this is what many investors are worried about.
But I think even Amazon, despite its size, still has a sizable expansionary runway ahead. According to the St. Louis Federal Reserve, e-commerce only accounted for 15.1% of overall retail sales in the U.S. in the first quarter of 2023. This percentage has increased over the past 20 years, thanks to the proliferation of the internet and smartphones. I don't know how high the figure can go, but the trend provides Amazon's e-commerce operation with a powerful tailwind.
The global cloud-computing market is expected to increase revenue at a compound annual rate of 14% between now and 2030. As the clear-cut leader in the industry, Amazon is positioned well to capture a lot of this growth. And because AWS produces solid margins, profits for the overall business are set to expand.
The valuation is reasonable
Last year dealt a blow to many tech stocks, even the most dominant ones, and Amazon wasn't spared, plunging 50% in 2022. As I noted above, 2023 has been a rebound year thus far, yet shares remain below their peak.
Amazon's stock trades at a price-to-sales (P/S) ratio of 2.6 right now. While that's more expensive than what shares sold for just six months ago, the valuation is substantially cheaper than Amazon's five-year historical average P/S multiple of 3.5.
If a superior product offering combined with solid growth prospects on their own weren't good enough reasons to buy the stock, maybe the attractive valuation will convince you that Amazon deserves a place in your portfolio.
