Amazon's (AMZN +0.30%) stock recently sank to a two-year low after it posted a mixed first-quarter earnings report on April 29.
The e-commerce and cloud giant's revenue rose 7% year over year to $116.4 billion, which matched analysts' expectations. But it posted a net loss of $3.8 billion, compared to a net profit of $8.1 billion a year earlier, as it incurred a $7.6 billion pre-tax loss from its investment in the electric vehicle maker Rivian Automotive. Its net loss of $7.56 per share broadly missed analysts' estimates by $15.78 per share.
It expects its revenue to grow just 3% to 7% year over year in the second quarter and for its operating profit to tumble 87% at the midpoint as it grapples with inflationary, supply chain, and other macroeconomic challenges.
Image source; Amazon.
Those weak numbers sparked a brutal sell-off, but did investors overreact and prematurely dump a promising long-term investment? Let's weigh the bear and bull cases to see if Amazon's stock is still worth buying.
What the bears will tell you about Amazon
Amazon's growth is certainly cooling off. Its revenue rose 38% in 2020 and grew 22% in 2021 as it benefited from stay-at-home measures throughout the pandemic. However, those tailwinds faded as lockdowns ended, more businesses reopened, and supply-chain headwinds kicked in. As a result, analysts only expect its revenue to rise 13% to $530.2 billion this year.
That slowdown isn't surprising, but Amazon also faces tough competition from resilient superstores like Walmart and Target -- which are using their brick-and-mortar stores to fulfill online orders -- and Shopify's army of independent online sellers.
Meanwhile, inflation is squeezing the retail segment's slim operating margins with higher labor and fuel costs. It also faces pressure from the newly formed Amazon Labor Union to allow its workers to unionize, and it's been pouring more cash into the expensive expansion of its media ecosystem (videos, music, and games) to retain its Prime members. That's why analysts expect its earnings to decline 58% this year.
Amazon usually relies on its cloud platform, Amazon Web Services (AWS), which operates at higher margins than its retail business, to drive its profit growth. AWS is still growing like a weed: Its revenue rose 30% in 2020, 37% in 2021, and 37% year over year in the first quarter of 2022.
However, AWS is still growing slower than Microsoft's Azure and Alphabet's Google Cloud, which both grew their revenues by over 40% year over year in their latest quarters. AWS's market share growth has also peaked in recent years, according to Canalys, as Azure and Google Cloud gained ground.
|
Company |
Market Share 2018 |
Market Share 2019 |
Market Share 2020 |
Market Share 2021 |
|---|---|---|---|---|
|
AWS |
33% |
32% |
32% |
33% |
|
Azure |
15% |
18% |
20% |
22% |
|
Google Cloud |
5% |
6% |
7% |
9% |
Data source: Canalys. Note: Market share for all four years is from the end of the year.
There's probably still enough room for all three cloud companies to keep growing, but Microsoft and Google could continue to pull away big customers -- especially big retailers that don't want to tether themselves to Amazon -- and force AWS to reduce its prices to stay competitive.
NASDAQ: AMZN
Key Data Points
What the bulls will tell you about Amazon
Amazon faces some major challenges, but the bulls will point out that the company has weathered plenty of economic downturns before.
It's locked in over 200 million Prime subscribers worldwide with its sprawling ecosystem of e-commerce and media services, and it remains the largest online marketplace in the U.S. and many other countries. Its growing lineup of cheap hardware gadgets -- including its Echo, Fire TV, Kindle, and Halo devices -- could make its ecosystem even stickier.
That's why Amazon raised its Prime subscription fees again earlier this year. That price hike could partly cushion the blow of its rising retail expenses.
As for AWS, the cloud unit still operates at much higher margins than Azure and Google Cloud. The segment's operating margins stayed at 29.8% in both 2020 and 2021 and then rose to 35.3% in the first quarter of 2022. Those stable margins indicate it still has the advantages of scale and pricing power in the cloud infrastructure market. This segment's continued growth could offset the near-term slowdown in its e-commerce business.
Amazon's advertising business also continues to grow. Its revenue rose 23% year over year to $7.9 billion in the first quarter, and it could eventually become a secondary profit engine for Amazon alongside AWS.
It's already the third-largest digital advertising platform in the US after Google and Meta Platforms' Facebook in the U.S., and it even generated more revenue than Google's YouTube last year. Dismissing the growth potential of this newer business could be a fatal mistake for the bears.
Lastly. Amazon's stock is now historically cheap at 45 times forward earnings and two times this year's sales. Those low valuations should limit its downside potential until it overcomes its challenges.
I'm still bullish on Amazon
I'm disappointed in Amazon's first-quarter report and its surprising decision to retain its stake in Rivian, but I'm not giving up on the company. The stock might stay stuck in neutral for the rest of the year, but I believe its e-commerce and cloud engines will heat up again over the long term.
