The most recent inflation data wasn't as bad as what we have seen in the past year. The news lifted the broader market, and many major companies benefited. Among them were Amazon (AMZN -1.64%) and PayPal (PYPL 0.64%). Both companies saw their shares jump by double-digit percentages on Nov. 10 on the heels of the latest inflation news.
Still, Amazon and PayPal remain down massively in the past year. And at current levels, investors should strongly consider buying and forgetting shares of both tech giants. Let me explain.
1. Amazon will rebound from 2022 slump
It is no surprise that cooling inflation provided a significant boost to Amazon as higher prices are affecting the company's business. Inflation-driven slowing consumer spending and higher costs have meaningfully impacted the company's results. And that's before we add the effect of the rising U.S. dollar.
In the third quarter, the company's revenue of $127.1 billion increased by 15% year over year, or 19% in constant currency terms. Amazon's top-line growth rate in the third quarter was lower than what it has gotten investors accustomed to over the years, but it increased compared to what we saw earlier this year.
AMZN Revenue (Quarterly YoY Growth) data by YCharts
However, the company's fourth-quarter guidance wasn't great. Amazon is predicting revenue growth of 5% year over year at the midpoint. In short, Amazon will remain vulnerable in the near term. But it is still an excellent stock to buy and hold. Amazon boasts a solid competitive edge from multiple sources, including its strong brand name -- one of the most valuable in the world -- and the network effect its e-commerce platform displays.
The more people use the platform, the more it becomes attractive to merchants, and vice versa. Further, Amazon generates plenty of cash, allowing it to pursue new expansion opportunities. The tech company ended the third quarter with about $35.2 billion in cash and equivalents, compared to $30.2 billion at the end of the third quarter of 2021.
One of Amazon's most significant opportunities is cloud computing, an industry in which it is one of the leaders thanks to its Amazon Web Services (AWS). This segment remains Amazon's biggest profit driver. In the third quarter, AWS reported an operating income of $5.4 billion, up 10.6% year over year, while the company's other two segments recorded operating losses.
It's not like AWS is navigating the economic challenges entirely unscathed. With businesses reining in spending, they are less likely to purchase cloud solutions. But aside from this slowdown related to the economy, the industry is projected to continue rapidly growing. Amazon has a hand in other businesses, from music streaming to video streaming.
The company's Prime program is still going strong, with over 200 million users who benefit from perks such as free one-day shipping on thousands of items. Amazon's entire ecosystem is robust, and the company will rebound and continue generating solid returns for investors after the economy recovers. Investors should stay the course with this top tech stock.
2. PayPal has plenty of room for growth left
PayPal is also vulnerable to economic problems. Lower consumer spending can impact the company's total payment volume (TPV, the total dollar value of transactions it facilitates) and revenue. Also, the fintech giant's user growth has been unimpressive lately. It ended the third quarter with 432 million total active accounts, a meager (by its standards) 4% year over year increase.
The company's TPV came in at $337 billion, up 9% year over year, while its revenue of $6.85 billion increased by 11% compared to the year-ago period. PayPal's earnings per share jumped from $0.92 reported in the prior-year quarter to $1.15 this time around. Overall, it was a pretty solid quarter for the company, even amid these troubles. True, like many other major tech companies, revenue growth has slowed for PayPal, but that's par for the course in this economy.
PYPL Revenue (Quarterly YoY Growth) data by YCharts
The good news for PayPal is that it continues to expand its payment platform, helping it remain competitive in the tough fintech industry. Earlier this year, the company's peer-to-peer payment app Venmo became available for checkout on Amazon for some of its users in the U.S. PayPal recently said that this feature will be available to all Venmo users in the U.S. by the holiday season.
Also, PayPal recently announced a partnership with Apple Pay that will allow the former's merchants to use their iPhones as point-of-sale systems, among other things. These initiatives are important as they enable PayPal to grow its already massive ecosystem. As one of the most recognized digital wallets in the world, it benefits from a strong brand name and the network effect, with more merchants and consumers attracting each other on the platform.
With increasing internet and mobile penetration worldwide, the continued rise of e-commerce, and greater reliance on digital modes of payment, PayPal has powerful tailwinds behind it that won't subside anytime soon. The company's penetration remains below 50%, even in its most advanced markets. That's why PayPal can continue growing by leaps and bounds for years to come.
