Amazon’s most recent quarterly report had some alarming news.
Amazon (AMZN -0.64%), a company that specializes in online shopping, has been one of the best investments on Wall Street over the past 20 years. The tech giant crushed the market during this time, giving it a huge market cap of $1.05 trillion. This makes it one of the few elite companies to have passed the trillion-dollar mark.
But the bears might say that Amazon’s past success and current size limit the stock’s upside potential, making it a bad investment right now. Is that right? Let’s find out by looking at Amazon’s business.
Amazon is facing a lot of problems.
Last year, Amazon had to deal with a lot of problems that had a big effect on its finances. At the top of that list were economic problems, like inflation and problems with the supply chain, which caused prices to go up and consumers to spend less. So, it was only natural that Amazon’s online business did not make as much money as it used to. People bought fewer goods than they would have otherwise, and the cost of shipping these goods went up.
On top of that, Amazon had to deal with tough year-over-year comparisons, just like many other companies that did very well at the start of the pandemic. Comparisons to the past years that weren’t good gave a bad impression of where Amazon’s business was going. Even worse, Amazon Web Services (AWS), the one thing that usually makes investors happy about the company, hasn’t been as good.
AWS is the cloud computing arm of the company. It usually grows much faster than the rest of the company’s business and makes much more money. This is still the case, but it looks like there are reasons to worry. AWS’s net sales rose by 20% from the same time last year to $21.4 billion in the fourth quarter. But the segment’s operating income dropped by about 2% from the previous year to $5.2 billion, which doesn’t happen very often.
During the quarter, Amazon’s total net sales went up by 9% from the same time last year to $149.2 billion, but its operating income went down from $3.5 billion to $2.7 billion. Amazon’s net income was $300 million, which was a lot less than the $14.3 billion it made in the same quarter last year. The tech company is having real problems, but there might be a way out.
Don’t worry about the next few months.
To decide if it’s too late to buy Amazon stock, you need to know if the company’s current problems are permanent and if it has a chance to keep growing its long-term sales, profits, and cash flow. As for the first question, Amazon is mostly a victim of market-wide problems that affect almost every company. These problems will go away when the economy gets better, which it will.
When that happens, customers and businesses will spend more, which will make the company’s e-commerce and AWS segments make more money. In the meantime, Amazon has tried to cut costs wherever it can, especially by laying off workers. Earlier this year, the company’s management said that about 18,000 people would lose their jobs.
Fears of a recession won’t help things get better, so Amazon’s business might continue to struggle over the next year. But the company still has a huge amount of work to do. Think about Amazon’s well-known online store. Over the past 10 years or so, the tech giant may have helped push people toward shopping online. The numbers point to this. As of June, Amazon had 37.8% of the U.S. e-commerce market.
The person who came in second wasn’t even in the top ten. If you don’t do a lot of things right, it’s hard to get such a big lead in a competitive field. Amazon’s plan has been to focus on the customer experience more and more. Amazon Prime members can get free one-day shipping on thousands of items, among other benefits, because the company wants to make its customers’ lives easier.
Amazon also has a huge selection of products and, most of the time, lower prices than its competitors. Because of this, its name has become a reference in e-commerce, which helps bring in new customers and keep old ones. That gives you a big edge over your competitors. E-commerce is still a huge long-term opportunity, though. In the U.S., from July to September of 2022, it still only made up 14.1% of all retail sales.
Amazon’s popularity and the features it offers make it almost certain that it will stay at the top of its field. AWS will do the same. Even in this area, the cloud-computing market is a long-term opportunity because cloud solutions help businesses become more productive and efficient. Even in this area, Amazon is the leader. The company will keep putting money into these and other opportunities that will help increase both the top and bottom lines over time.
Buy and forget
Every business has trouble. But strong companies can grow even when the economy is bad and for a long time after. Amazon will end up like this. The tech company will survive the current situation and all of its problems.
It can still beat the market for years to come because it has a lot of opportunities and a strong competitive edge. You can still buy Amazon stock. Shares of the company have dropped 38% in the last year, so now is a good time to buy.