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Shares of e-commerce giant Amazon (AMZN) have staged a spectacular comeback in 2023. While broader indices such as the S&P 500 ($SPX) and Nasdaq 100 ($IUXX) are up 9% and 20.4%, respectively, Amazon stock is up 37% year-to-date.
Amazon has significantly underperformed in recent months and currently trades almost 40% below all-time highs. Yet, despite the pullback, AMZN stock has returned over 750% to shareholders in the last ten years and is up a whopping 7,200% since May 2003.
Let's see if the tech giant can continue to generate outsized returns to shareholders in 2023 and beyond.
The Bull Case for Amazon Stock
Amazon is a market leader in several business segments. For example, it is the undisputed leader in online sales, the largest public cloud infrastructure company, the third-largest digital ad platform, and one of the biggest streaming platforms globally.
This market leadership and wide economic moat have allowed Amazon to report sales of $513.9 billion in 2022, up from just $15 million in 1997. In terms of sales, Amazon is the third largest company in the world, after big-box discount retailer Walmart (WMT) and oil behemoth Saudi Aramco.
Amazon reported revenue of $127 billion in Q1 of 2023, an increase of 11% year over year. In terms of business verticals, income from:
- Online sales were $51 billion
- Third-party sellers stood at $29 billion
- Amazon Web Services was $21.4 billion
- Subscription fees were $10 billion
- Digital ads were $10 billion
- Other Services were $5.5 billion
Armed with a vast physical and digital retail product portfolio, Amazon also has a vibrant third-party seller ecosystem that accounts for 60% of unit sales.
Further, it has successfully built technology infrastructure solutions in the public cloud segment. Launched in 2006, Amazon Web Services is now a $85 billion annual run rate business.
While Amazon stock has been hammered in previous bear markets, it has always generated exponential returns on the rebound due to its stellar management team. For example, during the dot-com crash in 2001, it secured letters of credit to purchase inventory for the all-important holiday season. It also streamlined costs to improve profit margins. Then, at the onset of the financial crisis in 2008, Amazon trained its guns on expanding its cloud business to benefit from a first-mover advantage.
The COVID-19 pandemic was a massive tailwind for Amazon and its e-commerce peers. As demand for online sales accelerated, Amazon's consumer business soared from $245 billion in 2019 to $434 billion in 2022. In addition, the company doubled its fulfillment center footprint in the three years compared to what it had built in the previous 25 years.
Amazon and its Ad Business
Online sales is Amazon's most prominent business, and Web Services accounts for most of the company's profits. But the ad business is Amazon’s fastest-growing segment due to a high customer purchase intent.
Enterprise ad spending has decelerated in the last 18 months, resulting in tepid growth for Alphabet (GOOGL) and Meta Platform (META). However, in 2022, ad revenue for Amazon grew by 25% year over year to $31 billion.
Amazon can easily tailor its sponsored products to customer search as it has access to vast amounts of consumer data and a robust machine learning algorithm. So, the return on ad spending is relatively high on Amazon, resulting in enviable top-line growth.
In the last two years, Amazon has expanded its suite of advertisement products by offering planning and measurement solutions to enterprises, leading to better targeting campaigns and higher retention rates.
What Next for AMZN Stock Price and Investors?
Due to its massive size, it's unlikely that Amazon will keep expanding at its historical pace in the upcoming decade. But the tech company is well poised to benefit from multiple secular tailwinds.
While Amazon leads the U.S. e-commerce market with a 38% share, online sales still account for just 15% of retail sales in the country. This figure is much lower in other developing countries, giving Amazon enough room to grow over time.
Moreover, cloud spending could touch $2.3 trillion by 2023, up from $546 billion in 2022. Given its current market share, Amazon Web Services could report sales of $337 billion by 2032.
Since Amazon's revenue growth is set to decelerate, the company will have to focus on improving profit margins. Historically, Amazon has sacrificed profitability to fuel top-line growth.
Investors expect Amazon to report adjusted earnings of $1.57 per share in 2023, compared to $0.71 per share in 2022. So, AMZN stock trades at 74 times forward earnings, which is quite steep.
The Final Takeaway
I believe that Amazon's market leadership across business segments, double-digit revenue growth estimates, and improving profit margins make it a top investment for long-term investors.
Overall, Wall Street analysts remain bullish on AMZN. 32 out of 39 analysts rate the stock a Strong Buy and its Mean Price Target is $142.16, which is 23% higher than where the stock is currently trading.
Just a few weeks ago, Morgan Stanley reiterated it's price target of $150, which is almost 30% higher than where the stock closed yesterday.
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