Sell-offs make everyone a little nervous. But the best thing to do is stop, take a breath, and refuse to panic. If you panic, you might sell a great stock or miss an amazing opportunity.
Right now, the climate of rising interest rates is proving chilly for investors. Tech stocks are paying the price since the sector is sensitive to the idea of higher rates.
But let's not put every stock in the same basket. Some solid companies with fantastic long-term prospects are dropping. You know what that means -- it's time to scoop up those shares, and at a good price. Amazon (AMZN -2.76%) -- which was down about 7.5% in today's sell-off -- is one of them.
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Down 30% this year
OK, let's be realistic. Amazon hasn't exactly been the best performer this year, even before this sell-off, as shares have dropped 30% so far. Amazon has been posting weaker-than-usual earnings for a few quarters because it's dealing with issues that many other retailers have been dealing with, too -- supply chain problems, labor shortages, and inflation.
Add to that the fact that Amazon has almost doubled its fulfillment network since the start of the pandemic, and you've got some elements weighing on earnings. And this is likely to continue as the above headwinds won't go away overnight. As a result, the shares might not rebound overnight, either.
Right now, you might think I'm making an argument to sell Amazon. But actually, I'm not because the challenges are temporary and aren't linked to the quality of the company's businesses. In fact, prospects for Amazon's two main businesses -- e-commerce and cloud computing -- look strong.
First, let's look at the e-commerce business. Amazon's Prime subscription service reached more than 200 million members globally in 2020. And the company has added millions of members in recent quarters.
Membership comes with perks like free same-day or one-day delivery and access to books, movies, and now even prescription medication. So once people sign up and pay the annual fee, it's likely they'll do a fair amount of shopping on Amazon.
In addition, e-commerce is growing, in general. The U.S. e-commerce market should reach $1 trillion this year for the first time ever, according to Insider Intelligence.
Big gains in operating income and sales
Amazon Web Services (AWS) may be an even brighter spot than the e-commerce business because the headwinds I mentioned above aren't really hurting it. The business posted a 57% increase in operating income and a 37% gain in sales in the most-recent quarter as contracts with big companies, such as Boeing and Telefonica, keep piling in.
AWS traditionally has driven profit for Amazon, so strength here is an important point. AWS is a market leader, and as it expands its infrastructure, I expect that to continue.
Now let's have a look at price. Amazon stock is trading at about 55 times trailing-12-month earnings, compared to more than 120 back in 2020. This is a bargain for a company that, over time, is likely to win big in both e-commerce and cloud computing.
After all, it's already a leader in both areas, and growth drivers are in place to keep that going once the temporary headwinds pass. As a result, this tech sell-off is the perfect time to buy Amazon.
