Amazon (AMZN +0.53%) has captivated Wall Street this year, rallying investors with a return to profitability in its e-commerce business and a promising expansion into artificial intelligence (AI). The company's shares are up about 70% year to date, a significant improvement from the 50% tumble its stock took in 2022 amid a market-wide sell-off.
Last year an economic downturn brought steep declines in consumer spending across multiple industries. Amazon's retail business was hit particularly hard, with repeated dips in revenue throughout 2022. However, various cost-cutting measures and easing inflation have put the company back on a growth path.
Amazon's e-commerce business has flourished in 2023. Meanwhile, the company is strengthening its long-term outlook by carving out a lucrative role in the budding AI market. As a result, now is an excellent time to get more familiar with this tech giant and consider investing before it's too late.
Here are three things about Amazon that smart investors know.
1. Prioritizing profitability with cost-cutting measures
Last year, Amazon's performance under economic strain was a wake-up call for the company. Its e-commerce segment posted combined operating losses of $10.6 billion in fiscal 2022. Amazon's saving grace throughout the year was its highly profitable cloud platform, Amazon Web Services (AWS), which posted operating income close to $23 billion. The challenging period forced the retail giant to rethink its business model and introduce a string of cost-cutting measures.
In 2022 Amazon closed or canceled construction on dozens of warehouses, shuttered unprofitable projects like Amazon Care, and laid off thousands of workers. The company continued its restructuring this year, with a priority on boosting profits.
Just this week, Amazon cut jobs in its music and gaming divisions. Christoph Hartmann, vice president of Amazon Games, explained the fresh round of layoffs by stating the retail giant is focusing its "resources even more on the areas that are growing with the highest potential to drive our business forward."
Amazon has shifted its business model to prioritize only what matters most to its customers and will increase profits. The changes are positive for the company's long-term outlook, allowing it to overcome macroeconomic headwinds and come out stronger on the other side.
2. An impressive turnaround in its e-commerce business
Management's restructuring over the last year is paying off, with Amazon's North American segment topping $4 billion in operating income in the third quarter of 2023. The figure significantly improves on the $412 million in losses the segment posted in the year-ago quarter.
Amazon's e-commerce segments make up more than 80% of its annual revenue. So when the retail business appeared to be bleeding money last year, investors panicked. However, the company has made an impressive turnaround this year, proving the strength of its leadership and its value as a long-term investment as it is able to successfully navigate temporary headwinds.
The tech giant's North American segment returned to profitability in Q1 2023 and has continued to hit new heights every quarter. Meanwhile, its international segment has gradually shrunk its losses. Alongside restructuring moves that are continuing to trim the fat, Amazon is heading into 2024 on better financial footing than it started this year.
3. Amazon is utilizing its cloud dominance to expand in AI
The AI market has blown up this year, leading demand for AI cloud services to skyrocket. Companies across various industries are seeking ways to boost productivity with the help of AI and are increasingly turning to cloud platforms for such services. As a result, AWS is well-positioned to profit immensely from the rise in AI thanks to its leading 32% market share in cloud computing.
Amazon might be slashing budgets in its gaming and music division, but it is taking the opposite approach to AI. The company is heavily investing in the segment, introducing a wide range of AI services on AWS this year.
Meanwhile, the tech giant has plans to diversify its role in AI by venturing into chip development. CEO Andy Jassy announced in June that the company had produced two new AI chips and promises to offer the best price-to-performance as it challenges market leader Nvidia.
NASDAQ: AMZN
Key Data Points
According to Grand View Research, the AI market was valued at $137 billion last year and will expand at a compound annual growth rate of 37% through 2030. Amazon faces competition from cloud competitors like Microsoft's Azure and Alphabet's Google Cloud. However, Amazon's dominance in the market and long list of prominent clientele gives it a massive advantage as the sector develops.
Amazon's business is on a promising growth trajectory as it expands its e-commerce and cloud businesses while cutting less profitable divisions. Now could be an excellent time to make a long-term investment in Amazon's stock.
