Amazon’s stock performance has seen better days, but the company still holds significant potential moving forward.
Amazon (AMZN -4.97%) has had some disappointing results recently, with its stock price climbing only 34% in the last five years. In contrast, the S&P 500 has returned 90% over the same period.
Yet, despite these mediocre profits, there are still several aspects of Amazon’s strategy that appear promising. Let’s explore why it remains a strong long-term investment choice and whether it’s a good option for your portfolio.
1. Heavy Investments in AI
Amazon Web Services (AWS) holds a dominant position in the public cloud space, capturing 30% of the market, while Microsoft has about 20% and Google 13%. Microsoft has made some strides recently, but Amazon is pouring substantial resources into artificial intelligence to maintain its leadership.
Just in the second quarter alone, the company invested $34 billion, largely for the expansion of its cloud services, and analysts project spending could reach $100 billion this year. The race in AI requires significant investment in cutting-edge data center infrastructure, and this financial commitment could keep Amazon ahead of its rivals.
Notably, AWS generated an operating margin of 33%, yielding $10.2 billion in operating profit for the second quarter, making that investment seem worthwhile. Furthermore, global revenues from AI cloud computing are expected to hit $2 trillion by 2030, providing ample opportunity for Amazon to grow in this sector.
2. E-Commerce Dominance
Even with increasing competition, Amazon still reigns supreme in the e-commerce arena, holding a 40% share of the U.S. market. For context, Walmart occupies only 13%, and Target remains around 2%.
A key factor in Amazon’s success is its Prime membership program, which offers benefits like speedy delivery, streaming services, and photo storage. Currently, the global Prime membership is estimated at 240 million.
Prime members are significant contributors to Amazon’s revenue, each spending an average of $1,170 annually, which is more than double what non-members typically spend, according to Consumer Intelligence Research Partners.
3. Impressive Growth in Advertising
Advertising is an often-overlooked segment of Amazon’s business model, yet it’s increasingly critical, with ad sales up 23% to $15.7 billion in the second quarter.
Amazon is now the third-largest advertising company in the U.S., following Alphabet and Meta Platforms. Its digital market share is projected to grow to 17% next year, compared to less than 11% in 2021. Considering that U.S. digital ad sales are estimated to reach $429 billion by 2029, Amazon’s success in this space could be vital in the coming years.
Will Amazon Stock Last a Lifetime?
For long-term investors, Amazon stock has been a tremendous success, soaring 2,800% over the last 15 years. However, expecting similar returns in the next decade might be unrealistic.
That said, it doesn’t mean you should shy away from adding Amazon to your investment roster. The company remains a key player in cloud computing, its forays into AI are just starting, and its established presence in advertising signals plenty of potential for future growth—even if it might not set you up for life.
