What a difference a year makes. Last November, Amazon (AMZN -1.64%) shares were trading at a 52-week high of $188.11. On Nov. 9, the stock was trading at less than half of that, hitting a low of $85.87 a share. As a result, Amazon made headlines as the first public company to lose $1 trillion in market value.
This astounding fall is enough to scare any investor away. But for those with an eye toward the long term, this creates a sizeable buying opportunity.
Amazon's substantial stock-price drop was due to a confluence of events, including some of the same macroeconomic factors that plagued other tech stocks in 2022. While the company is not perfect, Amazon is well-positioned to bounce back. Let's look at the reasons it makes sense to snatch up shares of Amazon stock right now.
What caused the sell-off in Amazon stock
To understand why Amazon stock will recover, we first need to look at the factors contributing to its reaching a 52-week low this month. The stock's fall started after the company reported third-quarter earnings on Oct. 27.
The factors that contributed to the drop include a disappointing revenue forecast for the company's fourth quarter when the holidays typically drive significant e-commerce sales. Amazon expects year-over-year revenue growth of 2% to 8%, due to inflation biting into consumer spending. Last year, Amazon experienced a 9% year-over-year sales jump.
Compounding the problem is a strong U.S. dollar. Amazon generated 22% of its Q3 revenue internationally. The strong U.S. dollar adversely affected foreign currency exchanges on overseas income to the tune of $5 billion.
These macroeconomic issues hit at the worst time for Amazon. The company had ramped-up spending to increase operational capacity in the face of surging demand in the past two years as the coronavirus pandemic's onset led to consumers spending more online.
But as consumers increasingly returned to pre-pandemic behaviors this year, Amazon experienced "moderating sales growth across many of our businesses," according to CFO Brian Olsavsky. Consequently, Amazon's Q3 free cash flow (FCF) plunged 871% from $2.6 billion last year to a loss of $19.7 billion.
Why Amazon will bounce back
Disappointing Q4 guidance, negative free cash flow, and a tough macroeconomic environment combined to hurt Amazon's stock. But these trends are transitory.
Weaker Q4 sales are understandable amid high inflation and a strong dollar, but these macroeconomic conditions will change. In the meantime, Amazon's management team is making adjustments to address the FCF fall and softening consumer spending.
Mr. Olsavsky stated Amazon is "taking actions to tighten our belt, including pausing hiring in certain businesses and winding down products and services where we believe our resources are better spent elsewhere." These cost-cutting measures should help improve Amazon's FCF position.
Moreover, Amazon remains the leader in the e-commerce and cloud-computing industries. It commands nearly a 40% share of the U.S. e-commerce market, where it made over 60% of its Q3 sales. The next closest competitor, Walmart, is a distant second with just a 6.3% share.
Amazon also possesses a potent weapon in its e-commerce business -- its marketplace of third-party sellers. These sellers accounted for 58% of Amazon's products sold in Q3, the highest percentage in company history. Third-party sellers contributed 23% of Amazon's Q3 revenue.
In cloud computing, Amazon's market share is 34%, while rival Microsoft holds second place at 21%. Amazon's AWS cloud segment saw Q3 revenue rise 27% over 2021 as the company introduced new features, such as collecting and analyzing connected-car data in real-time for BMW and other automotive clients.
The company also generates revenue from advertising, an area that grew 25% year over year in Q3. As the largest U.S. e-commerce website, Amazon is capturing a significant share of advertising dollars spent on retail sites -- enough to allow it, combined with Alphabet's Google and Meta Platforms' Facebook, to account for over 60% of U.S. digital ad revenue this year.
Expanding industries will fuel future growth
Amazon has another advantage helping it to bounce back from this year's woes. It operates in growing industries.
Global e-commerce sales are forecast to rise from $5.2 trillion last year to $8.1 trillion in 2026. The cloud-computing industry is expected to expand from $405.7 billion in 2021 to $1.7 trillion by 2029. Even the retail-advertising market will provide a tailwind to Amazon's growth. The industry is expected to nearly double from last year's $31.1 billion to $61.1 billion by 2024.
And despite this year's challenges, Amazon still grew sales. Third-quarter revenue rose 15% year over year to $127.1 billion.
As current macroeconomic conditions improve for companies such as Amazon, the stock price will recover. In fact, this is already happening, as evidenced by its sudden jump soon after hitting its 52-week low, due to better-than-expected inflation data. These factors make Amazon stock a compelling buy.
