Amazon.com Inc. (AMZN, Financial) is an undisputed leader in e-commerce and cloud computing services. However, beyond the hype and buzz around the company lies the crucial aspect of fundamentals.
In this discussion, I will dive into Amazon's financials and operations, examining its key factors to understand its long-term outlook.
Progressive business outlook
To begin, Amazon will spur its long-term growth through its substantial presence in three large and growing markets: e-commerce, cloud computing and digital advertising. The Seattle-based company, which operates one of the world's most popular online marketplaces, holds a leading 37.8% market share in the U.S. e-commerce market, positioning it well for significant profits over the long term. The company has doubled its logistics footprint over the last several years and is optimizing its warehouses to reinforce its leadership in e-commerce.
Despite a slowdown in online spending in 2022, Ameco Research says global business-to-consumer e-commerce spending is expected to expand at a 13% annual rate to hit $15 trillion by 2030. Online sales made up 19.7% of all worldwide retail sales in 2022 and are projected to reach 24% by 2026. Further, the e-commerce market, which is valued at $9.09 trillion, is projected to grow at a compound annual growth rate of 14.7% through 2027.
Furthermore, the company's cloud computing division, Amazon Web Services, holds a 34% market share and pulled in $80 billion in revenue in 2022, a 28.7% increase. Through a rapid pace of innovation in the cloud computing industry, the business offers the most remarkable breadth and depth of capabilities of any other provider. The Motley Fool reported cloud computing spending is expected to grow 16% annually to reach $1.6 trillion by 2030, and AWS comes with much higher margins than retail.
Amazon has become the fourth-largest digital advertiser in the world, taking share from market leaders like Alphabet's (GOOG, Financial) Google and Meta Platforms (META, Financial). The Motley Fool reported digital advertising is expected to grow 9% annually to reach $1.3 trillion by 2030, with much higher margins than retail. Further, advertising revenue accounts for a large part of its top line.
The company's long-term growth strategy also includes expanding into health care. By acquiring One Medical, Amazon will solidify its position in the health care services market.
Strategic use of AI technology
Amazon's strategic use of artificial intelligence has supported its long-term growth. By leveraging AI, the company has improved the customer experience, optimized operations and driven innovation in its products and services.
AI is used extensively in Amazon's logistics and fulfillment operations to reduce costs, improve efficiency and speed up delivery times. The technology has also helped the company increase profitability by optimizing pricing strategies and supply chain management. Additionally, it is deeply integrated into various aspects of Amazon's business, from Alexa, its industry-leading voice-based cloud service, to Amazon Go's cashier-less grocery stores and AWS's Sagemaker, a cloud infrastructure tool with machine learning models, enabling the company to develop new revenue streams.
Further, the e-commerce arm is integrating AI as algorithms run its recommendation engines for its retail offerings as well as video and music streaming, determining product rankings.
Looking ahead, drone delivery, which the company has long sought to implement, would be another AI application for the tech giant.
Competitive outlook
On the competition front, AWS's pipeline of new customers remains healthy and robust, indicating continued growth in market position. The cloud unit's sales contribution remains strong. It is expected to maintain its global leadership in the market over the long term, making it a potentially solid investment. AWS is also benefiting from the ongoing growth of the market.
Comparatively, Microsoft's (MSFT, Financial) Azure holds the second-largest market share at 21% and continues to gain almost two percentage points annually. Google Cloud has an 11% market share and gains about one percentage point per year. Other cloud providers, including Alibaba (BABA, Financial), IBM's (IBM, Financial) Kyndryl (KD, Financial) and Salesforce (CRM, Financial), have seen their collective market share drop to 36% due to their growth rates not keeping up with the big three. According to Synergy Research Group, the rapidly growing cloud market is coalescing around Amazon, Microsoft and Google.
Source: Statista
Amazon is also investing heavily in original programming, live sports and authorized third-party video content. The investment appears to be paying off so far as its "The Rings of Power" show garnered 100 million viewers and was the most-watched Amazon original series globally. Prime Video's competition with Netflix (NFLX, Financial) and Disney (DIS, Financial) should not be disregarded, though, as MarketWatch projects the streaming video market will grow to $125 billion by 2025.
Additionally, Amazon is one of the fastest-growing digital advertising companies. Retail advertising presents a challenge for advertisers due to managing ad spending across multiple retailers. In contrast, Amazon's size, third-party merchant network and video advertising capabilities give it a significant advantage. According to Insider Intelligence, Amazon commands 76.9% of retail ad spending in the U.S.
Analysts predict the U.S. retail media network ad spending market will grow from $85 billion to $100 billion by 2026. So if Amazon's market share shrinks to 70%, it could still earn $60 billion to $70 billion in annual revenue, double its current ad business.
Health care growth strategy
Amazon's next step in its expansion into health care involves acquiring One Medical. The partnership aims to transform how primary care is administered, using technology to provide a more convenient, faster and more personalized experience. Through the combination, Amazon plans to increase its health care market share by delivering competitive impacts for consumers and health networks.
Moreover, the company is offering affordable and convenient access to prescription medications through Amazon Pharmacy and PillPack services. With the introduction of RxPass, Amazon is targeting Prime members who can receive commonly prescribed generic medications for a low monthly fee of $5 and free delivery. The two services also provide most health insurance products at low and transparent prices, targeting customers who pay through prescription medication insurance.
Takeaway
In conclusion, Amazon's financial performance and market valuations will benefit from its leadership position in the e-commerce, cloud computing and digital advertising markets.
The strategic use of AI technologies in its operations and growth strategy for expansion into health care will support earnings growth through operational efficiency and diversity of end markets. On the other hand, its retail, cloud, entertainment and advertisement businesses endured the difficulty with remarkable sustainability. While there may be downside movements in the short term due to extended macro adversities, Amazon's long-term outlook has upside potential.
