Despite slowing retail sales growth Amazon (NASDAQ:AMZN) stock continues its run higher. Shares gained 80% in 2023 and are up 9% off the dip that started the new year. For a company that Wall Street often bashes as past its prime, the e-commerce giant certainly looks like it’s found its groove.
AMZN stock remains below its 2021 all-time high. It ended up depreciating by over 50%. Amazon demonstrated resilience and made a steady recovery. Investors may hesitate to buy now. Has it run out of steam after clawing its way back? Or is there still more growth ahead? Here are three reasons why Amazon might still deserve a place in your portfolio.
Reason No. 1: E-commerce and AMZN Stock
It might not be the thunderous growth of years past but Amazon’s retail sales footprint is widening. North American sales were up 13% across all of 2022 and they are running 11% higher so far in 2023. International sales were down 8% two years ago but are up 9% this year. Slowdown? Maybe but we’re talking about a company producing $466 billion in trailing retail sales. Generating double-digit growth at such scale is no easy feat.
And Amazon returned to retail profitability too. The North American segment posted $4.3 billion in operating income while losses in the international segment narrowed to just $95 million. The cost-cutting measures the e-tailer enacted over the last year are having an impact and boosting returns. Free cash flow (FCF) also did a 180-degree u-turn. From a $16.9 billion use of cash in 2022, Amazon’s trailing FCF is now a positive $16.9 billion.
Retail is, of course, the engine that drives revenue, but it’s the next reason to buy AMZN stock that drives true profits.
Reason No. 2: AMZN Stock and the Cloud\
Amazon Web Services has long carried the weight of profitability. The e-commerce business is now sharing more of the burden but AWS produced $17.5 billion in operating income over the first three quarters of 2023. That’s 74% of the total. Revenue is up 13% year to date.
In full transparency, AWS profit slipped slightly year over year and sales growth was slower than the 32% produced in 2022. The growth is also much slower than that recorded by Microsoft‘s (NASDAQ:MSFT) Azure (up 29%) and Alphabet‘s (NASDAQ:GOOG)(NASDAQ:GOOGL) Google Cloud services (up 22%).
Yet Amazon is still the indisputable market share leader in cloud infrastructure. But it reportedly is overhauling the segment to reignite sales growth in the business. Still, Amazon says its rivals are starting from a much smaller base than AWS and aren’t as open about their business. An AWS spokesman told SiliconANGLE, “it’s impossible to compare apples to apples.”
Reason No. 3: AI is the Future
It’s hard to put a number to the impact AI will have in Amazon’s continued rebirth but it will be significant. AI is infused throughout all of the company’s operations.
In retail, Amazon is using AI and machine learning to improve product recommendations and deploying tools for third-party sellers. They’ll be able to use AI to write better product descriptions while marketers can use them for more effective ads.
It’s paying off big time because Amazon’s digital advertising business is booming. Revenue surged 26% higher to over $12 billion in the third quarter. It now has a 7.5% share of the global digital ad market, according to Insider Intelligence.
The industry site expects Amazon to control a 15% share of the U.S. market by 2025. That will be just behind Meta Platforms (NASDAQ:META) at 18% and Google at 25%.
Amazon also has a suite of tools available for enterprise customers on AWS. From data extraction and analytics to automating workflows and building out chatbots for customer service applications, AI is a central piece of the plan.
The Bottom Line
AMZN stock might not be at the bargain-basement price it was at the start of 2023, but trading at almost 3x sales puts it at the same spot it was back in 2016. Even a seemingly absurd 81 times earnings is about average for where this stock has traded for most of the past decade.
Wall Street might like to think Amazon’s run is mostly over but it continues to innovate and grow. It offers investors with a long-term mindset a chance to still own a premiere business at a good price.
On the date of publication, Rich Duprey did not hold (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.
