Amazon (AMZN -1.43%) starts 2023 well, share price up 14% year-to-date. While the company’s e-commerce and cloud computing segments remain under pressure from ongoing macroeconomic challenges, new business opportunities may help propel the next leg of long-term growth.
Let’s discuss three reasons Amazon stock could be an excellent long-term investment.
1. E-commerce and cloud computing are cyclical
Like many tech-related companies, Amazon struggled significantly in 2022 due to macroeconomic pressures that were a bit out of management’s control. Inflation hurt the e-commerce business by constraining consumer spending while increasing the cost of doing business. And its cloud-computing segment, Amazon Web Services (AWS), saw slower growth as customers switched to ancillary services to save money amid the uncertain economy.
The good news is that these challenges aren’t shattering Amazon’s long-term thesis. When a cyclical company, investors should expect Amazon’s performance to improve as macroeconomic conditions ease. That’s because it still retains its competitive advantages through economies of scale and network effects, which are the benefits a platform gains the more people use it. Amazon also has new growth drivers.
2. Digital Advertising and Healthcare
Amazon’s competitive advantages in terms of scale and network effects can help the company expand into brand new verticals like digital advertising. The company’s more than 300 million purchase-motivated user base allows it to seamlessly place ads within its experience and gain key insights into customers’ shopping data and other habits. The company also places ads in brick-and-mortar stores operated by its subsidiary Whole Foods. In the third quarter, Amazon’s ad business grew 25% to $9.5 billion.
meta platforms and alphabets Advertising companies are significantly larger, generating $27.2 billion and $54.4 billion in respective periods. But with Alphabet’s slow growth rate of just 2.5% and Meta’s decline of 3.7%, Amazon seems poised to catch up with its larger rivals quickly.
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Healthcare is another potential growth driver. Amazon’s extensive logistics and fulfillment infrastructure lends itself well to the online pharmacy business. The company is too target telemedicine through the planned takeover of an online basic service provider A medical one for $3.9 billion pending regulatory approval. If the deal goes through, the deal would give Amazon a foothold in the $23.8 billion U.S. telehealth market and help it further diversify its revenue streams.
3. Amazon’s rating might be better than it looks
Despite its strong long-term thesis, Amazon’s third-quarter earnings left a lot to be desired. While net sales rose 15% year over year to $127.1 billion, the company’s bottom line deteriorated significantly. Net income fell 9.3% to $2.9 billion due to challenges such as inflation and the strength of the US dollar affecting the conversion rate of overseas income.
With a forward price-earnings ratio (P/E) Ratio of 50, Amazon stock is valued much higher than that S&P 500 average of just 21. But with e-commerce and cloud computing in a downturn, and new businesses like digital advertising and healthcare poised to drive the next leg of long-term growth, Amazon’s current earnings don’t seem to reflect the company’s potential. And Amazon stock looks like a buy.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Will Ebiefung does not hold any of the shares mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon.com, and Meta Platforms. The Motley Fool has a disclosure policy.
