Amazon (AMZN 3.43%) has attracted plenty of bulls this year, with its shares up 55% since the start of January. Investors have rallied as the company has delivered a solid return to profitability in its e-commerce business, and it has expanded its position in artificial intelligence (AI). The company could be on a promising growth path that you might not want to miss out on.
However, before filling up on Amazon shares, it's important to be aware of the positives and potential negatives of its business. The company has a solid long-term outlook as a leader in online retail and cloud computing. Yet, increasing competition in AI could threaten its growth prospects as companies like Microsoft and Alphabet heavily invest in the burgeoning industry.
So, here's the bear vs. bull for Amazon stock.
Bear: Steep competition in AI
Amazon has pulled out all the stops for its AI expansion this year. The company has gradually increased its library of AI tools on Amazon Web Services (AWS), adding features geared toward developers, businesses across multiple industries, and healthcare professionals. The company is casting a wide net as it works to retain its status as the world's biggest cloud company.
Additionally, CEO Andy Jassy announced in June the company was diversifying its position in AI by going into chip development and plans to offer the best-to-performance available as it takes on Nvidia. The retail giant has massive potential in AI. However, it will have to fight against steep competition, which could make it challenging to see large returns from its investment in the industry.
Microsoft is perhaps the biggest threat to Amazon, with its second-largest market share in the cloud market and its 49% stake in ChatGPT developer OpenAI. Meanwhile, Alphabet is making inroads with its own AI chatbot and a quickly expanding cloud platform.
Data by YCharts.
Along with being a threat to its business, these companies could be an even bigger threat to its stock. The chart above shows Amazon's price-to-earnings ratio is significantly higher than Microsoft's or Alphabet's, indicating it offers investors far less value. As a result, it's hard to justify buying Amazon's stock when there are cheaper ways to invest in AI and the cloud market.
Bull: A leader in two high-growth markets
While Amazon is facing growing competition in cloud computing, the company has nearly unrivaled dominance in e-commerce. Its leading position in both markets could make its stock a good option to hold over many years. And the longer you hold, the less its currently high price point matters.
The company is the biggest name in online retail in multiple countries, with a 38% market share in the U.S. For reference, Walmart holds the second-largest share at 6%. Meanwhile, data from Statista shows the e-commerce industry is projected to hit $5.5 trillion in 2027, expanding at a compound annual growth rate of 11%. Amazon is well-positioned to profit most from the market's development.
The company experienced significant profit declines in its retail segments amid an economic downturn in 2022, highlighting some vulnerabilities in its business. However, a solid comeback this year has shown the strength of Amazon's management and ability to react successfully to external challenges.
Various restructuring moves have put Amazon's retail business back on a growth path. In the second quarter of 2023, the company's North American segment proved this by hitting over $3 billion in operating income after reporting $627 million in losses in the year-ago quarter.
Amazon is home to a diverse business that allows investors to benefit from the development of multiple markets. Its leading positions in cloud computing and e-commerce could offer significant gains over the long term. In the past five years, its stock has risen over 45% despite having to contend with macroeconomic hurdles. There's no telling how high that figure will be in another five years with the rise of AI.
However, that doesn't change the fact that Amazon's stock is still trading at an expensive price point compared to the competition. As a result, investors should be prepared to either hold for the long term or consider other options until a dip boosts the value of Amazon shares.
