Amazon (AMZN +2.05%) reported fiscal 2022 first-quarter earnings after the markets closed on Thursday. Investors were disappointed, and Amazon's stock was down more than 15% on the day following the report. With Amazon's market value over $1.5 trillion before the release, the fall has wiped out more than $150 billion in wealth for shareholders.
The dramatic sell-off has some potential investors "kicking the tires" and wondering if they should buy Amazon now.
AMZN Market Cap data by YCharts
Slowing sales and rising costs are not ideal
In its first quarter, which ended March 31, net sales increased by 7% to $116.4 billion from the same quarter the year prior. Last year, the world was in a more restrictive shopping environment. Folks were more hesitant about shopping in person and looked to Amazon to avoid stores. As a result, Amazon's sales surged 44% in the first quarter last year. So this year's modest growth should be considered in context to the previous year's unsustainably high level.
Decelerating growth is to be expected and is not a troubling sign. However, what does appear problematic is the rise in expenses. Amazon's shipping costs, in particular, rose by 14% from last year, despite shipping the same number of units. Inflation and supply chain woes are hitting economies worldwide, and Amazon was not spared. To make matters worse, Amazon had spent aggressively during the pandemic to ensure it could fulfill the surge in demand. Indeed, it now boasts 1.62 million employees, up from 1.3 million in Q4 2020. It now has a higher fixed cost base, and sales are slowing.
The rising costs led operating income to fall to $3.7 billion in Q1, down from $8.9 billion in the same quarter last year. Management expects slowing sales and rising costs to continue into Q2. It forecasted revenue would grow by 5% and operating income of $1 billion, both at the midpoint for Q2. There was certainly plenty to be disappointed about Amazon's earnings announcement, and understandably the stock fell the day after.
That said, there were some bright spots. Amazon's Web Services (AWS) posted 37% year-over-year growth. The business is more profitable than its e-commerce sales, and it now comprises 16% of the company's overall sales, up from 13% at the same time last year.
Similarly, Amazon's advertising sales grew by 25% to reach $7.9 billion in Q1. Like AWS, advertising revenue is more profitable than e-commerce, so increasing the segment faster than the business is good news for long-term profitability.
Image source: Getty Images.
Should you buy Amazon stock now?
AMZN PS Ratio data by YCharts
Following Amazon's earnings report, the sell-off has it trading at a price to sales of 2.7. According to this metric, Amazon's stock is the cheapest it has been in more than five years. It's undoubtedly facing headwinds in the near term as economies reopen and it grapples with rising costs. But Amazon has proven it can face and deal with challenges effectively. Amazon's long-term prospects outweigh the near-term challenges, and investors can feel good about buying Amazon stock for the long-term.
