Amazon's (AMZN -1.24%) stock has made an impressive recovery this year after suffering steep declines because of macroeconomic headwinds in 2022. The company's shares fell 50% throughout last year but have soared 60% since the start of 2023.
The rally has come as easing inflation has put Amazon's e-commerce business back on a growth path. Meanwhile, the tech giant has shown increasing potential in the high-growth artificial intelligence (AI) market.
The company has a solid long-term outlook. However, before you go stock up on Amazon shares, it's wise to become familiar with the positive and negative aspects of its business.
Bear case: Its vulnerability to the economy
As arguably the biggest name in e-commerce, Amazon was hit particularly hard by 2022's economic downturn. Reductions in consumer spending caused the company to report operating losses totaling $10.6 billion between its two retail segments in the fiscal year. The company's cloud platform, Amazon Web Services (AWS), kept the company profitable. However, that didn't prevent its stock price from plunging.
Data by YCharts.
The chart above shows how Amazon saw the biggest stock decline last year among competitors Apple, Microsoft, and Alphabet. The sell-off highlighted how it is the most vulnerable among these companies to economic headwinds.
This is because the retail giant's e-commerce business makes up about 87% of its total revenue. And it holds the largest market share in that sector, so when inflation hikes lead to a consumer pullback, its business takes a beating.
Besides vulnerability in e-commerce, it has concerned investors with slowing growth at its AWS segment. The cloud platform's revenue growth has declined every quarter since the fourth quarter of 2021, falling from 40% to 20% in the fourth quarter of 2022. Rising interest rates have forced many businesses to slash their cloud budgets, with Amazon suffering the brunt of this as the largest cloud company.
It is exceptionally vulnerable to inflation hikes, but its dominant positions in the cloud and e-commerce markets also mean it has the most to gain from their recovery. As a result, it's crucial to keep a long-term mind set with Amazon's stock. It might suffer from short-term declines but will likely offer major gains over five to 10 years or more.
Bull case: It's diversifying its position in AI
The AI market was valued at $137 billion in 2022 and is projected to expand at a compound annual rate of 37% through 2030, per Grand View Research. The massive growth potential has attracted countless tech companies and bolstered the stocks of different businesses that are most likely to profit from AI's development.
As the biggest cloud company, Amazon has immense potential in AI. It wasn't the first in the industry, but it has used the first half of this year to take promising strides in the market and take its place in the swiftly growing sector.
In April, Amazon unveiled two new generative AI services on AWS: Bedrock and CodeWhisperer. The first allows users to develop custom chatbots, image-generation tools, and content such as full ad campaigns based on a product's description. The latter makes software development more efficient with its ability to generate code.
Moreover, Amazon is setting itself apart from competitors like Microsoft and Alphabet by venturing into the hardware side of AI. The company revealed this month it is taking on chipmakers like Nvidia with its own line of AI chips. Two have been announced so far, called Inferentia and Trainium, with CEO Andy Jassy saying these chips will have "much better price-performance than you'll find anywhere else."
The expansion into AI hardware diversifies the company's position in the industry and strengthens its prospects. If all goes to plan, Amazon could become the biggest name in AI with its powerful software and competitively priced chips.
Having risen 773% over the past decade, Amazon shares remain an attractive buy now as the company heads forth on its journey in AI.
