Amazon (AMZN) is one of the world's most influential companies and also one of its largest. Despite trading down roughly 32% from its high, the e-commerce and cloud computing leader still has a market capitalization of roughly $1.3 trillion. Is the tech giant on track to bounce back and return to crushing the market, or is its magic fading? Read on for a look at bullish and bearish dynamics that could shape the stock's performance.
The bear case for Amazon
Parkev Tatevosian: Amazon is a great business that has demonstrated an ability to innovate, offer excellent customer value, and outcompete its rivals. That said, those achievements have cost the company a hefty sum -- evidenced by its relatively small profit margins.
While Amazon's revenue has grown from $61 billion to $470 billion in the previous decade, its operating profit margin has remained below 6%. It seems that whenever Amazon's profits start expanding, it needs to make another massive investment to sustain its growth. Case in point: When Amazon's sales boomed at the pandemic's onset, it needed to make considerable investments in fulfillment capacity to serve that increase in customer demand.
Unfortunately for Amazon, the boom from the pandemic has reversed, yet Amazon is stuck with the investments in expansion. As a result, its operating profit has declined year over year for four consecutive quarters.
It's unclear when Amazon's need for large reinvestments will diminish so that a more significant share of its revenue can turn into free cash flow for investors. Moreover, Amazon is not a cheap stock, trading at a price-to-earnings ratio of 115. If there's a case to be made against Amazon stock, it's that the company continued to operate on thin margins while trading at expensive valuations.
The bull case for Amazon
Keith Noonan: As my colleague Parkev outlined, the timing of Amazon's big infrastructure investments is creating headaches for investors. E-commerce is already a relatively low-margin business, and the company's big spending push has coincided with the waning of pandemic-related demand tailwinds and rising expenses due to fuel costs, inflation, and other factors.
On the other hand, the company's big infrastructure bets show that it is still pursuing a long-term growth strategy, and investors might be overlooking the potential payoffs due to the near-term pains when it comes to profitability.
In addition to efficiency improvements that tend to come with economies of scale, Amazon's big bets on e-commerce could be bolstered by advancements in promising tech categories. The evolution of technologies including machine vision, autonomous vehicles, and robotics sets the stage for the business to become much more profitable. Amazon already enjoys massive scale and infrastructure advantages in e-commerce, and the company's online retail business stands to see massive benefits from automation over the long term.
While e-commerce margin gains will take some time to develop, it's worth keeping in mind that the company's cloud infrastructure business is currently firing on all cylinders. Revenue from Amazon Web Services (AWS) climbed 33% year over year to $19.7 billion in the second quarter, and operating income from the segment increased 36% to reach $5.7 billion. AWS leads the cloud infrastructure services market, and it should continue delivering strong sales and earnings growth as existing cloud software applications are scaled and new websites, apps, and communication tools are brought online.
Amazon continues to look very well positioned for the future, and I think long-term investors will be able to score strong returns by taking a buy-and-hold approach with the stock.
Should you buy Amazon stock today?
Tech stocks have seen turbulent trading this year, and Amazon's growth-dependent valuation and declining operating profits could set the stage for continued share-price declines. On the other hand, the company's core businesses continue to look very sturdy despite recent margin contraction, and the tech giant's leading positions in e-commerce, cloud services, and other categories could pave the way for strong earnings growth over the long term.
Investors looking to minimize risk in their portfolios might want to pass on the stock for now, but Amazon still has the potential to be a big winner for those willing to embrace the potential for volatility in the near term.