A rise in inflation and subsequent decrease in consumer spending have led to a startling stock market sell-off in 2022, with many companies hit hard by macroeconomic declines. Amazon (AMZN -1.64%) has been one of the hardest hit, with its share price down over 46% since January.
However, the company continues to be home to a robust business that is unlikely to be down forever. With its dominating market share in industries such as e-commerce and cloud computing, Amazon is well-positioned to regain its losses down the road.
With Amazon's significant loss in stock price, investors might be eyeing the shares and wondering if they're a buy. Let's see.
Waiting for the economic storm clouds to clear
To put it mildly, Amazon's latest quarterly report left a lot to be desired. Revenue for its third quarter of 2022 came in at $127.1 billion against analyst expectations of $127.46 billion. Meanwhile, Amazon Web Services brought in $20.5 billion versus the expected $21.1 billion.
The company's fourth-quarter forecasts have also fallen short. Amazon is expecting revenue of $140 billion to $148 billion, amounting to a year-over-year rise of 2% to 8%. Analysts at Refinitiv had previously projected that the company will earn $155.15 billion for the quarter.
In the wake of poor Q3 results, Amazon's stock sank some 26% between Oct. 25 and Nov. 3 as investors grew concerned over the company's consumer-reliant segments. As is to be expected, Amazon's retail business has been hit especially hard in 2022 as rising costs have slowed consumer spending.
So far, CEO Andy Jassy has responded by cutting costs in multiple divisions, such as reducing its warehouse footprint, axing some experimental tech projects, shutting down its telehealth service, Amazon Care, and pausing hiring in its executive positions.
Amazon is likely to continue suffering declines in the short term as geopolitical and macroeconomic factors keep operating costs high but consumer spending low. However, the future is still bright for the e-commerce titan. Fuel, shipping, and electricity costs should eventually regulate to more palatable figures, and Amazon continues to prioritize efficiency in its business.
As of June, Amazon was responsible for a 37.8% market share of the e-commerce industry. Regardless of temporary market declines in the next year, Amazon is well-positioned to see significant gains once it bounces back.
A cloud computing titan
While Amazon might be best-known for its e-commerce business, its cloud computing venture, Amazon Web Services (AWS), has quickly become its most crucial segment. Launched in 2006, AWS is responsible for hosting applications and websites for millions of organizations worldwide, with some of its biggest clients including Netflix and Microsoft's LinkedIn. The cloud computing service has swiftly risen in dominance, holding a 34% share of the $203.5 billion market in the second quarter.
AWS reported $20.5 billion in revenue in its latest quarter, 16% of Amazon's total Q3 2022 revenue. Additionally, AWS was responsible for 100% of Amazon’s operating income in Q3, underling how crucial the cloud computing business has become.
AWS lost some steam in the company's latest quarter, with its year-over-year rise of 27.4% lower than Q2 2022's increase of 33% and Q3 2021's 39%. Amazon CFO Brian Olsavsky attributed the slowed growth primarily to consumers and businesses reining in spending.
Still, AWS remains a promising business long-term. In Amazon's Q3 report, the company revealed AWS had $104.3 billion in unearned revenue as of Sept. 30. The future earnings come from long-term contracts that will complete in about 3.8 years.
Proceed with caution
Amazon has a dominating market share in multiple growing industries, which will likely boost its business in the long term. However, with its operating cash flow falling 27% in its latest quarter and its most profitable business declining in growth throughout 2022, the company will need time to bounce back.
Additionally, with a price-to-earnings ratio that is about 21% higher than a year ago -- despite the steep drop in the stock price -- Amazon's shares are not the cheapest around despite a sell-off.
As one of the leading tech and e-commerce companies in the world, Amazon is likely to come back strong over the long term, but it might be best to first watch its AWS business and wait until it begins seeing improving quarterly growth again before committing to Amazon.
