Some investors are looking closely at the stocks they own and asking themselves if they could weather an economic slowdown. U.S. President Donald Trump's threats of tariffs against trading partners and recent comments by the Federal Reserve about uncertainty in the economy are sparking fears.
Amazon (AMZN +0.26%) investors aren't immune from the concerns. Amazon's stock has tumbled 8% since the beginning of the year. But is the sell-off an overreaction?
Let's consider some of the hurdles Amazon could face over the next 12 months, as well as some likely ways the company may continue growing.
Image source: Getty Images.
The pessimistic outlook for Amazon
Some economists are concerned that President Trump's potential willingness to start trade wars could eventually tip the U.S. into a recession. J.P. Morgan recently changed its prediction on the probability of a recession occurring this year, from 30% likelihood to 40% currently.
Federal Reserve Chair Jerome Powell recently added some fuel to the recession fears fire when he said that economic "uncertainty is remarkably high." Consumer spending fell for the first time in nearly two years in January, indicating that Americans are pulling back on purchases.
Amazon's largest business by revenue is its North American e-commerce sales. That segment brought in $115.6 billion in sales in the fourth quarter, a 10% increase from the year-ago quarter. But consumer spending is moderating and consumer confidence is weakening, according to the Fed. If a full-blown recession or even a slowdown occurs, it could result in Americans tightening their belts further.
The optimistic view of Amazon
While there are legitimate concerns about consumer spending slowing this year, there's no guarantee it'll affect Amazon's top or bottom lines. Amazon is a resilient company, even during dismal economic times.
For example, the company's sales rose 29% during the 2008 financial crisis, and in the first year of the COVID pandemic, its revenue increased 22%. People can buy nearly anything they need on Amazon's marketplace. During downturns, customers may shift their spending habits on the platform, but not abandon it entirely.
Amazon holds a dominant e-commerce position, with about 40% market share. That easily outpaces its closest rival, Walmart, which has about 5% of the market. Americans aren't likely to stop buying goods online even during a recession, so this strong position gives Amazon the upper hand in riding out a slowdown.
And while I've focused mostly on Amazon's e-commerce business, the company makes half of its operating income from its cloud computing services, Amazon Web Services (AWS). This segment should help fuel Amazon's growth, because companies are ramping up artificial intelligence cloud computing spending.
NASDAQ: AMZN
Key Data Points
Goldman Sachs estimates that global AI cloud computing sales will reach $2 trillion over the next five years, and Amazon is sure to benefit. The company holds 30% of the cloud market, with Microsoft in second place with 21%. Companies are locked in an AI race right now, and even a downturn is unlikely to stop them from spending to stay ahead of the competition.
The most likely scenario
I don't think Amazon is immune from a severe economic slowdown, but the company's dominant position in cloud computing and e-commerce can likely soften the blow if a recession occurs.
More importantly, long-term investors should remember that buying a stock means you have an optimistic outlook for the company for many years to come. Even if we get a slowdown, Amazon's shares are cheaper than they were just a few months ago.
Buying the stock now, at a discount, could prove to be a smart move even if there's more uncertainty down the road. Amazon's lead in cloud computing and e-commerce isn't going away anytime soon.
