In the first quarter, most of the FAANG companies delivered underwhelming financial results. Alphabet missed earnings estimates on the bottom line, Meta Platforms posted its slowest sales growth as a public company, Netflix lost subscribers for the first time in a decade, and Amazon (AMZN -1.65%) turned in its first quarterly loss since 2015.
With the exception of Apple, all of the FAANG stocks have fallen at least 20% from their highs, and most have fallen much further. That creates a buying opportunity, and Amazon looks like the best bargain of the bunch.
Here's why.
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Why net income dropped
In the first quarter, Amazon's revenue grew just 7% to $116 billion, and online store sales actually fell 3%. On the bottom line, the retail titan posted a net loss of $3.8 billion -- its first quarterly loss in seven years. At first glance, Wall Street's disappointment is understandable, but investors need to dig a little deeper.
Those results are set against an exceptionally difficult macroeconomic backdrop. Russia's war on Ukraine has sent fuel prices soaring. During the earnings call, management noted that the cost to ship overseas containers has more than doubled from pre-pandemic levels, and inflation pressures collectively added $2 billion in expenses compared to last year. Amazon's net loss also reflects $8.2 billion in unrealized losses from its equity investment portfolio. Rivian alone accounted for $7.6 billion of that total.
Without those expenses and unrealized losses, Amazon's net income would have been $6.4 billion. And that doesn't even account for any inflationary pressure on consumer spending.
Wall Street is missing the big picture
Despite a disappointing performance in Q1, Amazon still benefits from an ironclad competitive position in the e-commerce industry. Its marketplace accounted for 41% of online retail sales in the U.S. last year, more than the next 14 retailers combined.
To reinforce that edge, Amazon has built out an extensive fulfillment and logistics network, giving the company greater control over shipping costs and delivery times. Building upon that infrastructure, the company recently announced Buy with Prime, a service that extends the benefits of its Prime membership program to third-party websites.
Amazon also dominates the cloud computing industry. In Q1, Amazon Web Services (AWS) captured 33% market share, easily outpacing second-place Microsoft Azure. In fact, a report from Okta suggests that Amazon has six times more cloud computing customers than Microsoft. Few businesses have ever achieved that level of success even one time, but Amazon has pulled it off twice.
In Q1, AWS revenue growth accelerated to 37%, and its operating margin expanded nearly five percentage points to 35.3%. That makes Amazon's cloud computing business much more profitable than its retail business, which typically achieves an operating margin in the mid-single digits. That means Amazon should become increasingly profitable as AWS accounts for a bigger part of its total business.
E-commerce and cloud computing are growing industries
To some extent, the novelty of e-commerce and cloud computing has worn off, but both markets are still growing at a good clip. According to eMarketer, online retail sales will climb 50% over the next four years, reaching $7.4 trillion by 2025. And Gartner says cloud spend will more than double over the same period, reaching $917 billion. That means both of Amazon's core businesses still have a long runway for growth.
Better yet, the company is actually gaining ground in a third high-growth market: digital advertising. Amazon accounted for 11.6% of digital ad spend in the U.S. last year, but eMarketer says that figure will hit 14.6% by 2023. For context, U.S. digital spend is expected to reach $270 billion in 2023. That means Amazon will generate about $40 billion in U.S. ad sales.
Amazon doesn't provide details about its ad business, but a 30% operating margin seems like a reasonable estimate. In Q1, Alphabet achieved an operating margin of 37% on its Google services segment, which primarily consists of advertising across Google Search, YouTube, and partner websites. In other words, digital advertising is much like cloud computing for Amazon. As it becomes a bigger part of the total top line, the company should become increasingly profitable.
The stock looks cheap
To sum things up, Amazon has a commanding lead in two high-growth industries, and it's gaining ground in a third. And with shares trading at 2.4 times sales -- their cheapest valuation in the last six years -- this FAANG stock is a screaming buy.
