With shares down almost 20% in the last 30 days, Amazon‘s (AMZN 0.69%) AI-powered rally is beginning to falter. There are also concerns that a potential economic slowdown could hurt its consumer-driven business model. Let’s explore how these near-term challenges could affect the stock’s performance over the next three years and beyond.
Recession fears mount
It is impossible to predict the future, but investors should pay attention to macroeconomic factors that could affect their thesis. For Amazon and other consumer-goods-focused companies, the main near-term threat could be a recession, which many economists see as more likely after the July unemployment rate (4.3%) came in higher than expected.
When people lose their jobs, they have less money to spend on online shopping, which leans toward discretionary items over necessities. However, the good news is that Amazon’s customers still look strong.
Second-quarter revenue increased 10% year over year to $148 billion, driven by expansion in North American and international e-commerce.
Both segments are relatively mature, so investors shouldn’t expect explosive growth in the future. However, Amazon has focused on juicing profitability through workforce reductions and supply chain efficiency, and these efforts are bearing fruit. Operating income increased 59% to $5.1 billion for North America, while the international segment jumped from a loss of around $900 million to a gain of around $300 million.
New growth and profitability drivers
While Amazon’s e-commerce business has transitioned into a stable cash cow, new segments will help power the next leg of long-term growth. Following the launch of OpenAI’s ChatGPT in late 2022, generative artificial intelligence (AI)-related demand has boosted the company’s cloud computing segment, Amazon Web Services (AWS).
AWS focuses on the infrastructure side of the AI opportunity, offering clients pre-trained AI services like Amazon Rekognition (which helps with image recognition and video analysis) or Amazon Macie, designed to use machine learning to protect clients’ sensitive data.
Amazon also boasts a foundational large language model (LLM) called Bedrock, which allows clients to create customized conversational algorithms in the same vein as ChatGPT, but trained on their own data.
Image source: Getty Images.
Amazon’s picks-and-shovels take on AI could shield it from some of the competition on the consumer-facing side of the opportunity. And the fact that these new AI offerings are integrated into the AWS platform could serve as an economic moat by making AWS a one-stop shop for all of a client’s cloud-related needs. Segment revenue jumped 19% year over year to $26.3 billion, while operating income surged 72% to $9.3 billion.
What might we expect in the next few years?
While Amazon’s e-commerce and cloud computing businesses are looking stronger than ever, the next 12 months could present some challenges. Data analytics company Statista gives the U.S. economy a 52% chance of entering a recession by May 2025.
Even if a downturn doesn’t occur, cracks are beginning to form in the AI growth narrative as consumer-facing start-ups fail to justify their infrastructure spending with revenue and earnings. According to Morgan Stanley analyst Keith Weiss, the industry is debating whether these companies will ever be able to monetize these algorithms, considering the huge amount of capital expenditure needed to train and run them.
With a forward price-to-earnings (P/E) multiple of 35, Amazon stock trades at a modest premium over the NASDAQ 100 estimate of 28. This might be a little high considering the near-term challenges it faces. Over the long term, Amazon is still a winner. However, investors may want to wait for a better price before taking a position in the stock.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
