Can You Justify Buying Amazon For This 1 Reason? – The Motley Fool

Can You Justify Buying Amazon For This 1 Reason? – The Motley Fool

Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
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Most consumers know e-commerce giant Amazon.com (AMZN 0.19%) for its online shopping business, reminded daily by the company’s vans bustling around neighborhoods to deliver packages. E-commerce is a sound investment thesis to buy the stock; it has roughly 41% market share of online shopping in the United States. Its massive size and depth of operations, including logistics and Prime membership, unlock great customer perks that make it tough on competitors. But there could be a better reason to own Amazon — one that might be its future — as the stock sits near its lowest price in a year. 
Image Source: Getty Images.
The company’s overall growth is still largely dictated by the e-commerce business in North America, which represents 60% of Amazon’s trailing-12-month sales. That segment has slowed recently, growing just 8% year over year in 2022 Q1 and 9% the prior quarter versus 40% year over year in Q4 of 2020. Online shopping boomed during COVID-19, so the slowdown probably results from tough comparisons to the previous year’s surge.
On the other hand, Amazon Web Services, which provides vital infrastructure for cloud computing, is still showing strong momentum. The segment grew year-over-year sales by 37% in Q1 2022 and 40% in the prior quarter (2021 Q4). The segment has steadily grown to a notable portion of Amazon’s business but is still just 14% of trailing-12-month sales, or $67 billion.
Amazon is the market share leader of global cloud infrastructure services, with an estimated 33%, according to Statista. That share has remained relatively stable, roughly flat from its 32% share in Q4 of 2017. AWS growth has instead resulted from an overall, ongoing migration of companies from on-premise computing to the cloud.
Research firm MarketsandMarkets estimated that the global cloud computing market was worth $445 billion in 2021 and could grow to $947 billion by 2026, an annual growth rate of 16%.
Investors will want to follow how Amazon fends off competition from significant peers like Alphabet and Microsoft, who combine for another 31% of the market. Amazon could benefit from other business segments that it could leverage to help add value to its AWS customers or incentivize them to use AWS over the competition. For example, Amazon has a growing ad business that did almost $8 billion in 2022 Q1. Offering discounted ad prices for its AWS customers, much like it tempts customers to pay for its Prime shopping service with streaming video and other perks, could offer the company one lever to pull that might help protect its market share.
The AWS segment is Amazon’s most profitable business, an important takeaway for investors. Amazon generated $19.7 billion in operating profits over the past four quarters, but the AWS segment alone generated $20.9 billion over the same four quarters.
Put another way, Amazon’s entire business outside of AWS lost money over the past year. AWS created all of Amazon’s operating income! It’s essentially Amazon’s “Golden Goose,” the cash cow that generates cash that fuels growth throughout the rest of the company.
But for some reason, many investors look to e-commerce when evaluating Amazon’s business. It’s time to snap out of that and start paying attention to AWS. The cloud segment could become even more critical over time if AWS keeps growing, generating a higher percentage of Amazon’s total revenue, and further becomes the cornerstone for how the company generates profits. Investors could get a great entry point to an excellent long-term investment in Amazon if AWS continues thriving while the share price slides lower.

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