When it comes to growth stocks, Amazon (AMZN 2.46%) is one of the poster children, up more than 830% in the past decade alone. That hasn't excused the company from taking investors on a roller-coaster ride, though.
After doubling its stock price within just over a year during the COVID-19 pandemic, Amazon's stock was slashed in half from its peak to the end of 2022. Since then, it's increased over 55% year to date (as of Aug. 21).
With an impressive 2023 rally, many investors have wondered if now is the time to buy, hold, or sell Amazon. For long-term investors, the answer is simple: buy.
Changing the narrative around its retail segment
Over the past few years, the investing case for Amazon has centered around its cloud segment, Amazon Web Services (AWS). It's not surprising, considering Amazon wouldn't have been profitable without AWS. In Q2, AWS was 17% of Amazon's $134.4 billion in revenue and 70% of its $7.7 billion in operating income.
It makes sense to be the focal investing point when you make up that much of a company's bottom line. However, Amazon's retail segment is making an impressive bounce-back after stalling post-COVID-19 surge. Amazon's management was very intentional about cost-cutting and making its logistics network more cost-efficient, and the results seem to show it's paying off.
The company's key move was transitioning away from its single national fulfillment network to a regional model that includes eight smaller networks. This reduced delivery and logistics costs and helped the company increase its margins.
Amazon's North America retail segment increased its revenue by 11% year over year, but its operating income jumped to top $3.2 billion after losing $627 million in the same period last year.
Data by YCharts
AWS' growth turnaround should mirror industry trends
Even with Amazon's retail making a turn for the better, AWS will still do a lot of the heavy lifting for the company's bottom line for the foreseeable future.
AWS sales increased 12% year over year, the lowest growth in years. The good news is that this should be the slowest growth gets for a while, especially if it follows trends from Microsoft's Azure and Alphabet's Google Cloud. In their latest quarters, Microsoft's "Azure and other cloud services" segment grew 26% year over year, and Google Cloud revenue grew 28% year over year.
Whether you consider AI to be hype or not, it should boost AWS' revenue in the coming years. Amazon has been utilizing AI for plenty of years when it comes to voice recognition technology, supply chains, and customer product recommendations. However, its approach to generative AI is a good strategic move.
Instead of rushing to create a consumer-facing application similar to OpenAI's ChatGPT (which Microsoft is an investor in) or Alphabet's Bard, Amazon created Bedrock, which lets companies build and scale custom generative AI apps for their businesses. That should increase the appeal of AWS, which is already the market leader with a 32% market share as of Q2 2023.
It passes the buy-and-hold test
Warren Buffett once said, "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes." In the case of Amazon, it absolutely passes the 10-year holding test for long-term investors. All three of its main segments -- retail, cloud, and adtech -- have good growth opportunities in the coming years, and Amazon is positioned to take advantage of them.
Amazon is also fairly priced, with a forward price-to-sales ratio of around 2.4 (almost 30% cheaper than its peak in the last three years).
Data by YCharts
When it comes to great companies like Amazon, sometimes you just have to remind yourself not to overthink it. The upside far outweighs the downside.
