Amazon (AMZN 2.61%) stock is up about 38% over the past year, and even though it's already the second-largest company in the U.S. by sales, it's in an excellent position to keep growing and rewarding shareholders. Here are three reasons why investors can feel confident about Amazon's future and why you might want to add it to your portfolio today.
1. It's all about AI
Amazon has incredible opportunities in artificial intelligence (AI). It's used AI throughout its business for decades, but it has released a slate of generative AI tools over the past two years that's changing its business and already generating billions of dollars for the company.
Most of the program is aimed at its Amazon Web Services (AWS) cloud computing customers. They have a variety of options depending on their size and needs, with services for developers to create their own large-language models built on their own data for a completely customized product, services for clients to build generative AI applications using Amazon's LLMs through its Bedrock program, and plug-in tools for small businesses that don't need or can't afford a custom application.
NASDAQ: AMZN
Key Data Points
In general, Amazon's approach is to be everything to everyone rather than striving for a niche audience, and it has released more AI features over the past year and half or so than most of its competitors combined. Last week, CEO Andy Jassy said that Amazon has developed almost 1,000 generative AI applications across the business.
Although it partners with Nvidia to offer its large clients the best tools, Amazon's also developing its own chips that can handle large data loads but are more affordable for smaller clients. It also just added DeepSeek as another cost-effective option for the Bedrock and SageMaker programs. The AI business continues to change and grow, and management thinks this is just the beginning of what it envisions as a massive opportunity.
2. Don't forget e-commerce
There's so much excitement and newness in AI, but e-commerce is still Amazon's bread and butter. Amazon has an unbeatable lead in this area, with nearly 38% of all U.S. e-commerce sales. E-commerce is still growing as a percentage of retail sales, and it's expected to reach 41% of global retail sales by 2027, according to the Boston Consulting Group. That's a huge organic tailwind for Amazon.
But the company is not relying on tailwinds, and is investing in upgrading its logistics networks to provide more products to more customers faster. The better it can do that, the more its Prime customers rely on it for their essentials. After changing from a national to a regional fulfillment network, Amazon is now focused on improving its inbound channels. It made hundreds of changes over the past few months that have resulted in a 25% improvement in its ability to spread merchandise across distribution centers. In the third quarter, customers who received free same-day shipping increased 25% year over year.
That's important because as high as its lead is, Amazon is facing stiff competition from other companies that could chip away at its dominance. Walmart, for example, continues to grow and hasn't let Amazon overtake it as the largest U.S. company by sales. Walmart slipped when it didn't immediately invest in e-commerce several years ago when it was accelerating, but it's doing that now, and it's paying off. E-commerce was responsible for much of Walmart's growth last quarter, and it has an edge over Amazon in its 4,600 physical stores that it can use as a delivery base and for omnichannel options.
Amazon knows it has to up its game to keep its lead, and it's doing just that, leading to improved outcomes and stronger sales.
3. Amazon is highly profitable
The underlying investment thesis for any long-term holding has to be profitability. Net income and free cash flow are the engines that drive a company's ability to keep up operations and continue to innovate with new ventures. Amazon provides operating profit as its baseline profitability measure, but its stock tends to move more closely with its net income, since that is the proverbial and literal bottom line.
The reason Amazon, and other companies, sometimes tend to prefer operating income in place of net income as the more telling measure of profitability is because net income takes into account tax benefits or losses that can switch back and forth between quarters. Although net income has remained steady over the past few quarters, there were a number of reports in 2022 when it fluctuated at high levels because of taxes related to Amazon's investment in Rivian. Amazon is partnering with the company to develop a fleet of energy-efficient delivery vehicles.
Operating income increased from $11.2 billion to $17.4 billion in the third quarter, an incredible showing for a huge and already highly profitable company. Net income was up from $9.9 billion to $15.3 billion. Management is guiding for $16 billion to $20 billion in operating income in the fourth quarter.
