Key Points:

1.       Amazon turned its e-commerce infrastructure into a business that now generates about a quarter of its revenue.
2.       The firm leveraged its immense consumer base to produce a multibillion-dollar advertising operation.
3.       Amazon is just getting started with a number of opportunities, including AI and internet access from outer space.

Over the past year, many tech stocks surged, driven by the excitement surrounding artificial intelligence (AI). Amazon (AMZN -0.74%), the e-commerce powerhouse, was among those benefiting from this trend.

Amazon's stock climbed from a 52-week low of $118.35 to a peak of $201.20 in July. However, this impressive rebound wasn’t solely fueled by AI advancements.
 

Amazon's sharing its supply chain mastery

In its path to becoming a dominant player in the e-commerce industry, Amazon needed to construct impressive infrastructure to achieve its supply chain goals, such as fast shipping speeds. For example, the company uses AI to manage an army of over 700,000 robots in its warehouses to process customer orders around the clock.

Recognizing the challenge businesses face in optimizing e-commerce operations, Amazon shifted its approach, transforming its e-commerce infrastructure from a necessary cost into a revenue-generating asset. In the fall of last year, Amazon introduced "Supply Chain by Amazon," extending its logistics services to third-party retailers.

CEO Andy Jassy highlighted the growth of this business, stating, "That collective set of businesses is growing very significantly." In fact, Amazon has spent years building its revenue stream from third-party sellers, which now represents a substantial portion of its income.

Since Jassy took over as CEO in 2021, revenue from Amazon's third-party seller services has increased from $103.4 billion in 2021 to $140.1 billion in 2023. By Q2 2023, these services contributed to nearly a quarter of Amazon's $148 billion in total revenue.
 

Opportunities in Artificial Intelligence (AI)

Amazon's expansion into generative AI has been a major driver of excitement around its stock over the last two years. But the impact goes beyond just excitement—customers are actively using and benefiting from Amazon's AI tools. As Amazon continues to enhance its offerings and introduce new features, it is well-positioned to maintain its leadership in cloud computing and increase its market share.

Amazon Web Services (AWS) saw its sales growth accelerate by 18.8% year-over-year in the second quarter. CEO Andy Jassy attributed this to three key factors: clients have completed cost-optimization measures spurred by high inflation, they're focused on modernizing their infrastructures, and there's growing enthusiasm for AI.

Jassy has repeatedly emphasized that 85% of corporate infrastructure spending remains off the cloud, but he expects that trend to reverse soon. This shift is already beginning, potentially driving a surge of new business to AWS, the global leader in cloud computing with a 31% market share. AWS is positioning itself to maintain its competitive edge as this transition unfolds.

In response to customer feedback, AWS management recognizes that clients are seeking flexibility and options in their cloud spending. To meet this demand, AWS is developing a wide range of services, from highly customizable solutions for developers to user-friendly, plug-and-play options tailored for small businesses, especially in the context of generative AI.
 

A price you may not see again anytime soon

The market reacted negatively when Amazon's guidance for third-quarter revenue in its second-quarter report fell slightly below expectations. Analysts had projected $157.14 billion, while Amazon provided a midpoint estimate of $156.25 billion.

Following the report, Amazon's stock dropped, hitting its lowest price-to-earnings (P/E) ratio in a decade. However, the stock has since rebounded as many investors saw it as a bargain. At its current price, Amazon trades at 44 times its trailing-12-month Amazon earnings, still a relatively attractive deal compared to its historically higher valuation.

There are plenty of other reasons to have confidence in Amazon stock, such as tailwinds -- if interest rates are cut next week -- and its expanding healthcare business, and now looks like a great time to buy.
 

Amazon's Dominance in Digital Advertising

As one of the most-visited websites globally, Amazon provides advertisers with access to a vast consumer audience. This extensive user base has fueled the rapid expansion of Amazon's digital advertising business, making it a key player in the industry.

Amazon currently holds the third-largest share of the global digital advertising market, generating $12.8 billion in ad revenue in Q2—a 20% increase year-over-year.

The company's ad business is set for further growth. This year, Amazon began selling ads on its Prime Video service, which boasts a large and attractive viewership for advertisers. With one of the biggest market shares in video streaming, Amazon is positioning itself as a strong competitor to Netflix.

Advertising is also boosting Amazon's profitability. As CFO Brian Olsavsky noted, "Advertising remains an important contributor to profitability in the North America and international segments."
 

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.