Amazon’s Strategic Evolution: Is It Still a Smart Investment?

For decades, big tech has driven immense wealth creation in America. Consider Amazon (NASDAQ: AMZN) as a prime example, with shares soaring over 240,000% since its public debut in 1997.

But past success doesn’t guarantee future growth. Let’s delve into what lies ahead for this e-commerce giant.

A Streamlined Approach

CEO Andy Jassy, who succeeded Jeff Bezos in 2021, has recalibrated Amazon’s focus from aggressive growth to profitability. The company has reduced thousands of jobs, optimized its fulfillment processes, and cut back on less lucrative ventures. These changes have positively impacted its profitability.

In the latest year, Amazon’s net sales increased 11% to $158.9 billion, while operating income jumped by 55% to $17.4 billion, thanks in large part to cost-cutting efforts in its core U.S. e-commerce division.

Additionally, Amazon’s cloud computing arm, Amazon Web Services (AWS), emerged as a new growth driver, contributing 60% of operating income ($10.4 billion) for the company.

Initially designed to support Amazon’s internal data needs, AWS has now become a pivotal player in emerging technologies like generative artificial intelligence (AI).

Exploring New Opportunities

AWS has positioned Amazon as a frontrunner in the AI landscape, rivaling industry leaders such as Microsoft, Alphabet, and Meta Platforms. These companies are heavily investing in developing hardware for large language models (LLMs).

Although it’s premature to declare a winner in this competitive landscape, Amazon benefits from being the largest cloud service provider, commanding a market share of 31%, making it ideally positioned to leverage new technologies.

In the AI market, businesses primarily seek to rent computing resources, particularly from Nvidia, for their AI projects.

Amazon is further developing its custom chips (Trainian and Inferentia), which are optimized for specific tasks, potentially offering better cost-efficiency. Management indicated this opportunity is evolving three times faster than cloud computing did during its early days.

Image source: Getty Images.

Despite the rapid growth of the AI infrastructure market, many applications targeting consumers may not yield profits right away. It remains uncertain whether this AI boom will merely be a passing trend or if it will provide sustained growth for Amazon’s AWS division.

Competing with Low-Cost Rivals

Amazon’s ambitions extend beyond AWS; it is also launching a new online marketplace called Haul to take on budget-friendly Chinese competitors like Shein and Temu. This platform will focus on affordable fashion and home goods, with prices predominantly under $20, many under $10, shipping directly from China.

While this new venture may not revolutionize the market for Amazon, standing its ground against competition is vital for maintaining its substantial 40% share of the U.S. e-commerce sector.

Is Amazon Still a Path to Wealth?

When considering a stock that can create millionaires, one might expect it to double or triple in a few years. Despite its varied growth avenues, Amazon may not meet these expectations. Cost reductions are finite, and recent improvements in operating profits could level off as comparisons become increasingly difficult.

Nevertheless, with a forward price-to-earnings ratio (P/E) of 34, Amazon could still represent good value. This is only a modest premium over the Nasdaq 100 estimate, which seems reasonable given the company’s leading roles in e-commerce, cloud computing, and AI.

Don’t Miss Out on This Investment Opportunity

Have you ever felt you’ve missed a chance to invest in top-performing stocks? If so, you’ll want to pay attention.

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See 3 “Double Down” stocks »

*Stock Advisor returns as of November 18, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, serves on The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is also on the board. Randi Zuckerberg, a former marketing director at Facebook and sister to its CEO, Mark Zuckerberg, is a member as well. Will Ebiefung does not hold any of the mentioned stocks. The Motley Fool has stakes in and endorses Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool also recommends options for Microsoft. The Motley Fool maintains a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.