Amazon Stock: Why Investors Must Be Patient for Double-Digit Growth

Despite volatility and recession concerns, Amazon's (AMZN -1.65%) thesis is still largely intact and shareholders could potentially see double-digit growth in the foreseeable future. In this clip from "3 Minute Stocks Updates" on Motley Fool Live, recorded on May 25, Motley Fool contributors Brian Feroldi and Brian Withers discuss Amazon's earnings report and the challenges facing the e-commerce giant.

Brian Feroldi: Amazon reported earnings and the headline numbers were lackluster, shall we say. Seven percent revenue growth. Amazon to the quarter to $116.4 billion. That beat Wall Street's estimate and was toward the high-end of management's guidance. Look at earnings per share though, $757.06 in the red down negative, that was a huge reversal from the $16 last year, way below Wall Street's estimates. What's happening here? Well, let's take a look by category. North American sales were up 8%, but look at operating income. Huge reversal down to negative $1.5 billion. International sales down 6% year-over-year. They were flat when you adjust for foreign currencies. Same principal here, operating income swung to a huge loss. Save us Amazon Web Services. It did. Amazon Web Services up 37% and operating income was $6.5 billion. Really, Amazon Web Services was essentially the only bright spot here. Now, what the heck is going on with that massive net loss that I just talked about? Well, you have to dig into this line here on the income statement called other income/expenses. In the year-ago period, this figure was positive $1.7 billion. This quarter, negative $8.5 billion, that's a $10 billion swing. What the heck is going on here? A few years ago, Amazon made a sizable investment in Rivian (RIVN -3.62%). Rivian has since come public. There's a new accounting rule out there where companies have to mark up their profits when their stocks are rising in their investments and mark down their profits when those companies stocks are declining. If anyone's paid attention to Rivian stock, it's been straight down essentially since it came public, so Amazon has to mark that down. Now, beyond that, the more troubling news in the quarter was just the lack of operating profitability. What is going on there? Management says that it estimates $6 billion in extra costs were hitting it this quarter,. Two billion due to wage inflation, two billion due to overstaffing, and two billion due to over capacity. The good news there is that four of those six billions are completely within Amazon management's team control. They are going to be focused on normalizing their cost structure based on the current demand that they're seeing. Now, speaking of current demand, management only guided for 3-7% growth in Q2 of this year. What's up with that? Well, one reason is the economy is slowing down. The second more important reason is last year Prime Day happened in Q2. This year Prime Day is happening in Q3. That's a 400 basis points swing in revenue. This is going to be a really challenging quarter for Amazon. However, management has made it very clear. Their focus right now is focused on cost structure, rightsizing the business to meet actual demand and rightsize the business after two massive investment years.

Brian Withers: Yeah, Brian. I'm going to double-click on that overcapacity and overstaffing thing. As brick-and-mortar retail shops are pretty much now open everywhere, I didn't expect Amazon's growth to slow down as much as it has and I've even seen a tweet and taking a tweet from a random person with a grain of salt, but it seems to ring true the indication was, "Hey, I got a friend that works in the Amazon distribution center and volume was down from 75,000 packages a shift, to 50,000 or less. Is this something that should concern shareholders?"

Feroldi: What has happened in the world over the last two years, Amazon's revenue exploded because of COVID, what did management do? They invested like crazy in their capacity. They spend more on CapEx in the last two years than they did over the previous 20 combined. They likely overshot with hiring. They likely overshot with warehouses. Now that demand is normalizing, now the world is open back up to say nothing of the fact that we could be heading into that R word as a country, and dealing with inflation. This company, like so many other companies right now, have massive challenges on their hand. The good news is the long-term thesis for this company is still largely intact. What's happening with the stock price recently is the huge reaction to our 50% growth is the new normal to single-digit growth is the new normal. My personal opinion is this company can return to double-digit growth, likely in the next two or three years, but it's going to be a bumpy ride.