With Amazon (AMZN +3.47%) shares down 11% since the start of the year, a lot of investors are wondering if it's time to buy the dip. Like many tech stocks, the diversified e-commerce giant has been hit by a souring macroeconomic outlook and possible generative artificial intelligence (AI) fatigue. Let's explore what the next 12 months could have in store.
Business is still booming
Amazon is a massive $2.04 trillion company and it isn't done growing yet. Fourth-quarter net sales jumped 10% year over year to $187.8 billion. And while that may seem like a small growth rate, we are talking about hundreds of billions here in annual sales. Its recent top-line growth was mainly powered by a strong showing from its North American e-commerce unit, which had a particularly successful holiday shopping season.
NASDAQ: AMZN
Key Data Points
Amazon's bottom line also continues to flourish in the post-pandemic economy. It has been about four years since CEO Andrew Jassy took the helm and shifted away from the growth-at-all-costs strategy of his predecessor, Jeff Bezos, to prioritize profitability. Jassy's approach helped Amazon expand operating income by 61% year over year to $21.2 billion in Q4, with the cloud computing division, AWS, contributing around half of the total.
Management is not yet finished cutting costs. On the heels of other large layoffs, Amazon intends to eliminate close to 14,000 managerial positions this year, which analysts at Morgan Stanley predict could save it between $2.1 billion and $3.6 billion annually.
New growth drivers
Amazon isn't cutting costs from a position of weakness. It also enjoys long-term growth drivers like AI. The company plays a middleman role in the cloud infrastructure side of the opportunity, essentially accumulating hardware from chipmakers like Nvidia to power its massive data centers, and renting out this processing power to the software companies creating AI applications.
Management plans to expand Amazon's role in ways that will somewhat encroach on Nvidia's territory. This month, it announced plans to offer discounted access to servers powered by its custom-made AI chip, Trainium, which is designed to train generative AI large language models (LLMs).
According to online news outlet The Information, these chips match the performance of Nvidia's H100 GPUs at about a quarter of the cost. And while Nvidia has moved on from its Hopper (H) architecture to its more advanced Blackwell-based chips, Amazon still looks poised to capture a share of the AI chip market.
AI-related demand helped power the growth of AWS in the fourth quarter. This segment is vital for Amazon because it boasts significantly higher margins than e-commerce.
What are some of the challenges?
Image source: Getty Images.
Amazon's first-quarter guidance had a little red flag. While management expects top-line growth of between 5% and 9%, they also anticipate an unfavorable foreign currency exchange impact of $2.1 billion on its sales. This may reflect increasing volatility in foreign exchange markets due to President Donald Trump's tariffs and trade policy, which have led to retaliatory tariffs, boycotts, and fears of a trade war.
Furthermore, JP Morgan's chief global economist now sees a 40% chance that the U.S. will fall into a recession this year. As a multinational company that operates significantly in the consumer goods space, Amazon looks especially vulnerable to these types of headwinds. During an economic downturn, consumers are likely to pull back on discretionary spending, and may shift more of their shopping to Amazon's discount retail rivals like Walmart, which focuses more on essential goods.
Where will Amazon be in 1 year?
Over the long term, Amazon's future looks bright. The company is still growing at a healthy clip while cost-cutting and new synergistic business ventures should help boost the bottom line. The near term situation is a little bit more complicated. While analysts are optimistic (projecting a gain of 36% over the next 12 months), macroeconomic uncertainty and and a potential recession could cause downward revisions. Investors may want to wait for a better entry point before they consider opening a new position in the stock.
