Amazon's (AMZN -1.35%) stock price tumbled 13% during after-hours trading on Thursday, Oct. 27, after the e-commerce and cloud giant posted its third-quarter earnings report. Its revenue rose 15% year over year (and grew 19% in constant currency terms) to $127.1 billion, but that total missed analysts' estimates by $370 million. Its net income fell 9% to $2.9 billion, or $0.28 per share, which still cleared the consensus forecast by seven cents.

Amazon's numbers weren't terrible, but is its stock worth buying in this rough market for tech stocks? Let's review what the bears and bulls likely saw in Amazon's latest report.

An Amazon driver reviews a delivery.

Image source: Getty Images.

What the bears saw in Amazon's report

The bears will note that Amazon expects its revenue to rise just 2% to 8% year over year in the fourth quarter. That midpoint of that forecast implies its revenue will grow 8% for the full year, compared to its 22% growth in 2021.

During the conference call, CFO Brian Olsavsky blamed that slowdown on the "continuing impacts of broad-scale inflation, heightened fuel prices, and rising energy costs" on consumer spending, as well as the "increased foreign currency headwinds" from a strong dollar.

The bears will also remind investors that Amazon usually subsidizes the growth of its lower-margin e-commerce business with Amazon Web Services' (AWS) higher-margin cloud revenue. But over the past year, AWS' revenue growth has cooled off and its operating margins have declined.

Metric

Q3 2022

Q2 2022

Q1 2022

Q4 2021

Q3 2021

AWS sales growth

27%

33%

37%

40%

39%

AWS operating margin

26%

29%

35%

30%

30%

Data source: Amazon. YOY = Year over year.

Macro headwinds are causing many companies to curb their spending on big cloud deals. Currency headwinds, which reduced AWS' reported revenue growth by a percentage point in the third quarter, will also exacerbate that pressure as the U.S. dollar continues to strengthen.

AWS is still the largest cloud infrastructure platform in the world, but it faces fierce competition from Microsoft's Azure and Alphabet's Google Cloud, which both generated stronger growth than AWS in their latest quarters. That pressure is likely limiting AWS' pricing power and squeezing its margins.

It wouldn't be that troubling if AWS were still firing on all cylinders as its e-commerce business faced a cyclical slowdown. But both segments are now grappling with slower growth as they ramp up their spending, and that pressure has compressed Amazon's operating margins over the past year.

Metric

Q3 2022

Q2 2022

Q1 2022

Q4 2021

Q3 2021

Operating margin

2%

2.7%

3.2%

2.5%

4.4%

Data source: Amazon. YOY = Year over year.

For the fourth quarter, Amazon expects its operating margin to slip to a midpoint of just 1.4%, which implies its full-year operating margin could decline from 5.3% in 2021 to approximately 2.3% in 2022.

The bears believe that toxic mix of slowing growth, shrinking margins, and tough macro headwinds make Amazon an unappealing investment. The stock also isn't cheap at 43 times next year's earnings.

What the bulls saw in Amazon's report

The bulls will point out that Amazon's results look a lot better on a constant currency basis. It expects the currency headwinds to reduce its full-year revenue by 460 basis points, which implies its top line will actually grow about 7% to 13% year over year in constant currency terms in Q4.

Those currency headwinds are also curbing its international sales, which declined 5% year over year to $27.7 billion on a reported basis in Q3. But in constant currency terms, its international sales actually rose 12%. Its North American sales also increased 20% year over year to $78.8 billion, which indicates its core U.S. market remains resilient.

That resilience can be attributed to Amazon Prime, which surpassed 200 million paid members globally last year. About 150 million of those subscribers are in the U.S., and the stickiness of that ecosystem -- which offers exclusive discounts, access to digital media services, and other perks -- widens its moat against other retailers. Its sales on this year's Prime Day (which occurred in late July) also contributed approximately 400 basis points to Amazon's Q3 sales growth.

As for AWS, it should remain ahead of Azure or Google Cloud even as its growth cools off. Canalys estimates that AWS still controlled 31% of the global cloud infrastructure market in the second quarter of 2022, compared to a 24% share for Azure and an 8% slice for Google. AWS is also the only one of the big three cloud platforms which is firmly profitable.

Last but not least, Amazon's advertising revenue rose 30% year over year in constant currency terms to $9.55 billion, accelerating from its 21% growth in Q2 even as the broader digital ad market slowed down. The robust growth of that higher-margin segment could gradually reduce Amazon's dependence on AWS.

Which thesis makes more sense?

The bulls believe Amazon's business will stabilize again after the macroeconomic headwinds finally dissipate. That might be true, but I think the bears will remain in control until that happens -- and Amazon still isn't cheap enough to be considered a value stock in this difficult market.