Amazon (AMZN 2.39%) has built a long history of earnings growth over time thanks to its e-commerce business and its cloud computing unit. On top of that, the company has been one of the early winners of this artificial intelligence (AI) boom — it’s a user and developer of AI and also offers customers access to AI products and services. All of this has made Amazon a compelling investment for a wide variety of investors — from those seeking a certain level of stability to
those seeking growth. Amazon stock has delivered, climbing nearly 100% over the past three years. The good news is these good times may be far from over. In fact, two statistics, one that applies to Amazon’s e-commerce business and one that applies to the cloud business, could signal explosive growth ahead for the company. Let’s zoom in for a close look. Amazon is benefiting from its investments First, though, let’s consider where Amazon stands right now. As mentioned, the company is a leader in the
growth businesses of e-commerce and cloud computing. These units have helped earnings climb, and we can see through return on invested capital that Amazon has also benefited from its investments over the years. AMZN Revenue (Annual) data by YCharts The ROIC patterns show that Amazon generally makes wise investing decisions. This track record may boost our confidence in the company now, as it’s in a key investment phase, aiming for $200 billion in capital expenditures this year. Much of this spending will support the cloud
unit, Amazon Web Services (AWS), as demand for AI and non-AI services is soaring. Attention to this area is crucial because AWS actually makes up the lion’s share of the company’s overall profit. Certain headwinds have weighed on Amazon and other AI stocks in recent times, however. These range from uncertainties regarding turmoil in Iran and the U.S. economic environment to questions about the longevity of the AI spending cycle. While these elements may pressure Amazon in the short term, they aren’t likely to push
the company off track. And this brings me to the two statistics that signal explosive growth ahead. The first is: Worldwide, 80% of retail sales still happen in physical stores. Amazon’s Andy Jassy wrote in a shareholder letter earlier this spring that he expects that to change. So, even though Amazon already is delivering annual sales of more than $700 billion, the company still has plenty of room for expansion. And since Amazon did a major overhaul of its cost structure a few years ago,
it should be perfectly positioned to benefit as a greater shift from physical stores to e-commerce takes place. What may happen with global IT spending Now, here’s the second statistic: 85% of global information technology spending remains on premises. That refers to investment in a company’s own data centers and equipment, for example, instead of relying on a cloud service. Jassy expects this to change, and it seems very logical that this transition will unfold. Here’s why: Companies can save a huge amount of time
and money by turning to a cloud service instead of building out their own platforms on-site. Turning to a cloud also offers a company access to an extremely broad portfolio of products and services — AI and non-AI. In fact, AWS is seeing high demand in both areas. Of course, this transition to the cloud may not happen overnight, as companies that rely on their on-premises systems may continue along that path to amortize their investments. But it’s very likely that many will transfer over
when the time is right; and newer, younger companies may immediately opt for the cloud rather than spending on premises. This trend should gradually increase growth for AWS. So, even though Amazon already is a market giant, it still has plenty of room to run, and that makes it an exciting tech stock to buy and hold as these two shifts supercharge growth.