Bear markets can be ruthless. Even companies with excellent long-term prospects will be dragged down in a downturn at the sign of the slightest short-term issue. That’s what happened to Amazon (AMZN) in 2022. And even as it’s rebounding this year, the tech giant remains down by 35% in the past 12 months, which puts it well below the broader market in the same period.
But if anything, this represents an excellent entry point for investors whose investment timelines extend to five years or more. Let’s consider why investing in Amazon while its stock remains down is a good idea.
Amazon’s impressive track record matters
It’s customary to say that past performance doesn’t guarantee future success — a true statement. However, past performance isn’t irrelevant either. It can reveal important clues about how a company is run. On that front, it’s hard not to be impressed with how Amazon performed consistently in the past decade on almost any metric that matters to investors. Consider Amazon’s revenue and stock price.
It’s true that Amazon reported a rare net loss last year as it dealt with higher costs and lower sales than it would have liked, largely due to the challenging macroeconomic environment. But even on the bottom line, Amazon has generally grown at a good clip. What does that tell investors about the company? Amazon has found success by pursuing highly lucrative opportunities (sometimes ahead of the curve) and being laser-focused on customer satisfaction.
That’s how it found success within the e-commerce market: becoming a leader in the industry. One could repeat that sentence word for word, only replacing “e-commerce” with “cloud computing.” Now the question is: Can Amazon repeat the same success from here?
Exciting opportunities ahead
Amazon has a blueprint for success. The company also has plenty of room to grow in its core industries. Consider e-commerce, where the tech giant held a 37.8% share of the U.S. market as of June 2022. Walmart was in second place at 6.3%. Amazon achieved this lead by offering a combination of a vast library of goods at lower prices than most competitors, and one- or two-day shipping on thousands of items.
Amazon’s e-commerce platform is so convenient that many people (myself included) have started buying nearly everything on the website. That grants Amazon a competitive edge, and other factors reinforce it. For instance, Amazon’s brand name is one of the most valuable worldwide and one that constantly attracts customers. It’s also one of the most visited websites in the world.
The company’s e-commerce platform benefits from a network effect, with its value increasing as more people use it (more shoppers attract more merchants, and vice versa). Having a strong moat is one of the keys to long-term success. Amazon has, so to speak, loads of it. And there’s a long runway for growth in the e-commerce sector, which made up only 14.7% of total retail sales in the U.S. in the fourth quarter of 2022.
Amazon’s opportunities in cloud computing are perhaps even more exciting. That’s not just because the company also leads this industry with a 34% market share as of December 2022, or because this business also benefits from a moat in the form of high switching costs. It’s more exciting because it boasts higher margins than Amazon’s e-commerce operations.
But the company won’t stop there. It has a presence in music and video streaming, where there is still plenty of space for growth.
Amazon has been looking to make a mark in healthcare too. The company’s ventures haven’t always been highly successful, but it doesn’t need to hit a home run with every swing. Amazon has more than enough opportunities to keep its revenue and earnings growing if even a few yield the kinds of returns it intends.
Buy and forget
Amazon encountered some issues lately, but that’s true for most businesses. However, the company has solid enough operations to handle even the ugliest downturn. Further, Amazon has a wide moat and several growth avenues to pursue beyond the next decade. That’s why investors should park the company’s shares in their portfolios for good, especially as they are down substantially in the past 12 months.
— Prosper Junior Bakiny
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Source: The Motley Fool