It’s almost hard to believe that Amazon (NASDAQ:AMZN) stock has underperformed the S&P 500 over the past five years. Yet, it’s true, as shares of the tech juggernaut have only returned about 50% versus roughly a doubling for the blue-chip US index.
Looking ahead, however, that might be about to flip. Here are three things that might support a sustained rally in Amazon stock.
Huge efficiency drive
Let’s start with the most topical. Today (28 October), the company announced that it will cut 14,000 roles from its corporate workforce. Other sources have said it could end up as many as 30,000. If accurate, it would be the largest corporate jobs cut in Amazon’s history.
What we need to remember is that the world is changing quickly. This generation of AI is the most transformative technology we’ve seen since the Internet, and it’s enabling companies to innovate much faster than ever before…[W]e need to be organised more leanly, with fewer layers.
Amazon
Meanwhile, efficiency drives are expected to extend into its warehouses, where most of its workforce is based. Earlier this month, the New York Times reported that executives plan to eventually replace more than 500,000 jobs with robots and automation.
Now, I don’t want to gloss over the human cost here. Amazon says it will look to prioritise internal candidates to help as many people as possible find new roles, but clearly it’s never nice to hear about big job losses.
Nevertheless, from an investing perspective, a leaner workforce and more robots should boost margins over time. This is important because its North American e-commerce margins are still quite slim (at around 7%).
Not only that, but order-picking robots should quicken delivery times, further sharpening the company’s competitive edge.
Relentless innovation
This doubling down on rapid innovation, particularly in AI, is part of Amazon’s commitment to “operate like the world’s largest start-up“.
One product that I think might be underappreciated is its next-generation AI assistant (Alexa+). According to the firm, customers using this are talking more than twice as often to Alexa and having “deeper conversations on any topic”.
Importantly, people are using it to do more things, such as book reservations. As chief executive Andy Jassy said in July’s Q2 earnings call, “If I have guests coming over. I can say, Alexa draw the curtains, put the light on the porch and the driveway, increase the temperature by five degrees and put on music that would be great for a dinner party. And she does all that just through using natural language“.
The high-margin advertising opportunities from this should be large. Indeed, management has even mentioned the possibility of embedding ads in conversational interactions via Alexa in future.
The firm also owns a large stake in Anthropic (the AI lab behind Claude). However, the start-up was recently valued at a whopping $183bn, stoking fears about an AI bubble. If true, and Anthropic’s value crashes at some point, Amazon could suffer a big paper loss on its stake.
Starting valuation is attractive
However, on balance, I’m very bullish on the stock and think it deserves a place on investors’ radars.
Especially as the forward price-to-earnings ratio for next year is 28.5. That’s not expensive for a world-class tech company that continues to innovate rapidly.
