Amazon's (AMZN 1.04%) stock plunged after the company posted double-digit sales growth for the third quarter. While the acceleration in growth was great news, management surprised Wall Street analysts by issuing revenue guidance for the holiday quarter that was below expectations.
Considering the broader economic weakness that is beyond Amazon's control, the stock's collapse looks overdone. Management remains focused on the long term by making investments in the business that expand the company's competitive advantage to drive more growth.
The stock has been cut nearly half over the last year, but there are three positives from the earnings report that point to a buying opportunity.
NASDAQ: AMZN
Key Data Points
1. Amazon's retail business is strong
Amazon's worldwide net sales were $127 billion for the quarter, up 19% year over year excluding foreign currency fluctuation. Even excluding the boost to sales from Prime Day, Amazon's top line still accelerated to a growth rate of 15%, up from the second quarter's 10% sales growth excluding currency changes.
The deceleration in Amazon's sales growth last year contributed to the stock's underperformance. Still, given the high returns on capital that Amazon's business has earned historically, it was a good sign that management continued to ramp up spending on technology infrastructure and fulfillment capacity to support growing demand across the business.
It's clear those expenditures, which management expects to reach $60 billion for 2022, are paying off with improved selection on the retail side that is meeting more demand heading into 2023.
However, market traders were more focused on next quarter's guidance for sales to grow between 6% and 12% year over year on a constant-currency basis. Amazon blamed the lower guidance on the uncertainty in the economy, the war in Ukraine, and the energy crisis in Europe. These are temporary headwinds that don't impact Amazon's long-term ability to grow sales.
If Amazon can post sales growth of around 10% with these headwinds, it is a strong business indeed.
2. Prime Video is a key advantage
Amazon has also been investing heavily in new content for Prime Video, which contributed to lower profits in the short term. Again, Amazon is earning good returns on these investments in the form of new Prime memberships that the market is overlooking.
The Lord of the Rings: The Rings of Power original series had over 25 million global viewers on the first day after release. The new series drove more signups for Prime than any other Amazon Original, the company said.
During the launch in September, Amazon's exclusive broadcast rights of NFL Thursday Night Football also drove the most signups within a three-hour window in the company's history.
The company doesn't update the specific number of Prime memberships very often, but the last update put the total at more than 200 million earlier this year. Prime Video is a key acquisition channel for new customers, especially in international markets. This is a powerful advantage that will continue to help Amazon gain market share in e-commerce.
3. Amazon Web Services is adding tremendous value
Another factor that contributed to management's lower guidance was slowing spending from companies on cloud services. Amazon Web Services (AWS), which generates the bulk of Amazon's profits, expects fourth-quarter growth in the mid-20%, which is a small deceleration from the 28% reported for the third quarter. Investors should pay attention to management's explanation for the slower rate of growth, because it points to a competitive advantage in the cloud market.
More companies are pulling back on cloud spending due to the uncertainty in the economy. However, as management explained on the earnings call, Amazon is building a tighter relationship with its customers by showing them where they can save money, including helping companies get more out of their current data workloads and switching to lower-cost products. This level of service will encourage these customers to spend more money with AWS when the economy is healthier.
Overall, Amazon is in fine shape. The recent sales acceleration, investments in Prime content, and strengthening customer relationships are good reasons to be bullish on Amazon's future.
