Amazon (NASDAQ:AMZN) has underperformed the Standards and Pracices (S&P) 500 throughout the past five years. That’s an unusual position for AMZN stock since Jeff Bezos took it public in May 1997 at $18.
One share from its 1997 IPO is 240 today after the e-commerce giant split four times (1998, twice in 1999, and 2022). Twenty-six years later, an $18 investment is worth $31,435, a compound annual growth rate of 33.3%.
Clearly, Amazon hasn’t performed for shareholders in recent years. Part of the problem is the comedown that occurred when e-commerce sales returned to historical growth.
However, Amazon has many moving pieces that deliver much of the company’s profits. When push comes to shove, e-commerce isn’t the most crucial piece of the Amazon puzzle.
Here’s what to watch in the coming months to determine whether Amazon has what it takes to return to what, until 2021, was an almost straight trajectory upward
Advertising Continues to Gain Ground
Amazon’s ad business did very well in 2022, growing by 21% to nearly $38 billion, or 7.3% of its overall revenue. The company divides its consolidated sales into seven different revenue streams.
In 2022, its revenue from advertising services was $2.5 billion higher than its subscription services segment. This includes its very profitable Prime membership. Two years earlier, its subscription services were $5.4 billion higher. What a fantastic turn of events.
It is one of the few examples of a large ad business growing. Alphabet (NASDAQ:GOOG) is the largest player in the digital ad business with 39% market share. It grew ad sales by 7% in 2022. The second-largest by market share is Meta Platforms (NASDAQ:META). Its ad revenues in 2022 fell by 1% throughout 2021.
Then there’s little old Amazon with just 7% market share. That’s barely one-third of Meta’s position. Mark Zuckerberg will not sit idly by while Amazon takes its business.
As The Motley Fool’s Danny Vena recently pointed out, the company’s plans to introduce limited Prime Video ads allow existing customers to opt out of the ads for $2.99 extra per month.
A current Prime membership in the United States is $139 a year, $11.58 per month paid annually, or $14.99 per month if you pay monthly. The $2.99 fee is 25.8% higher if you pay annually and 19.9% monthly.
Now, if you only get Amazon Prime Video without all the other benefits like free shipping, the $2.99 fee is a 33.3% bump for the ad-free service. This charges $8.99 monthly.
Vena rightly points out that the company is doing this because it believes it can generate more thanb $7.2 billion from Prime Video ad sales. Given its growth in ad sales in 2022, I have no doubt it can do this.
I would be watching any revenue news related to Prime Video like a hawk. It might not be a gamechanger, but it will be meaningful nonetheless.
AI + AWS = $$$ Profits
The other thing to keep an eye on in the next few quarters is the company’s biggest moneymaker, Amazon Web Services (AWS). In 2022, it generated just 15.6% of Amazon’s revenue but 186% of the company’s $12.2 billion in operating profit.
It did this because its international and North American businesses lost money in 2022 due to increased shipping and fulfillment costs in both geographic regions. This was also due to increased investments in its fulfillment network and technology.
Through the first six months of 2023, North America made $4.1 billion on an operating basis. Its onternational segment lost $2.1 billion, down from a $3.1 operating loss in the first six months of 2022.
Unfortunately, AWS only earned $10.5 billion in operating income. This is 13.9% lower than a year earlier on sales of $43.5 billion. Assuming AWS generates $87 billion in 2023 revenue (revenue to date annualized), that’s revenue growth of 8.6%, considerably lower than 29% in 2022.
So, with companies looking to cut costs where they can, AWS is getting hit with requests for the company to help on that front. However, the company believes that the slowdown won’t continue. It considers that revenues lost from assisting customers to optimize costs will be made up with increased workloads and new customers from generative artificial intelligence (AI).
However, if you’re a shareholder, you can expect Amazon to increase its spending on AI drastically. At the end of September, it announced an initial $1.25 billion investment in the AI startup Anthropic. It will not have a board seat and is in a minority position. Amazon also has an option to invest an additional $2.75 billion.
Like OpenAI and Microsoft (NASDAQ:MSFT), this could be the goose that lays the golden egg for AWS and Amazon.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
