There's no denying that 2022 has not been a great year for Amazon (AMZN -1.43%) stock. It's easy to look at a chart, see that the stock is down over 40% year to date, and begin to panic.

Understanding why the stock has cratered is a bit more complex, though. At its core, Amazon can be thought of as two businesses: E-commerce and cloud computing. While the company has made a number of strategic investments in advertising, gaming, and media, the e-commerce and cloud segments are, by far, its largest operations.    

Given the lingering effects inflation has on consumer purchasing power, coupled with fears of recession and corporations adjusting budgets, both the e-commerce business and the cloud segment for Amazon have been beaten down.

As a result, the company is laying off employees in an effort to scale back expenses and preserve operating capital. While all this certainly is concerning, investors need to zoom out and think long-term. Amazon has several growth levers that have not reached peak performance, and the stock has done nothing but fall since its split earlier in the year. Let's dig into Amazon's entire business, analyze what's growing and what's not, and determine if the stock's current valuation makes it a buy. 

The current state of Amazon

For the three months ended Sept. 30, 2022, Amazon reported $127 billion in total revenue, up 15% year over year. The company's North American operation increased 20% annually, while its cloud segment, Amazon Web Services (AWS), increased 27% year over year. Meanwhile, Amazon's International segment decreased 5% year over year. This is not entirely surprising when accounting for the fact that the company experienced a $5 billion negative effect from foreign exchange during the third quarter.

While revenue increased in two out of three of Amazon's reporting segments, it's more important to analyze the profitability profiles of each business. Despite 20% revenue growth in North America, this segment reported nearly $400 million in operating losses during the quarter. On top of that, the International segment reported $2.5 billion in operating losses just in Q3 alone. It's important for investors to remember that these segments have been operating near breakeven levels for several quarters now.  

Now, as inflation continues to affect consumer spending and corporate budgets, executives must take a look at the entire business and find ways to stretch cash. During the Q3 call, Amazon CFO Brian Olsavsky stated:

As the third quarter progressed, we saw moderating sales growth across many of our businesses, as well as the increased foreign currency headwinds I mentioned earlier, and we expect these impacts to persist throughout the fourth quarter. As we've done at similar times in our history, we're also 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.

Management did not mince their words. Amazon is cutting costs, mostly in the form of headcount reductions. While this can appear as a cause for concern on the surface, these synergies are what mature companies must execute during times of an unclear macroeconomic outlook. 

A person working in a fulfillment center.

Image source: Getty Images.

When in doubt, zoom out

While Amazon separates its revenue into North America, International, and AWS segments, a number of sub-categories comprise these three larger streams. The table below illustrates Amazon's revenue by sub-category for the last five quarters.

Sub-Category Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022
Online stores $49,942 $66,075 $51,129 $50,855 $53,489
Physical stores $4,269 $4,688  $4,591 $4,721 $4,694
Third-party seller services $24,252 $30,320 $25,335 $27,376 $28,666
Subscription services $8,148  $8,123 $8,410 $8,716 $8,903
Advertising services $7,612 $9,716 $7,877 $8,757 $9,548
AWS $16,110 $17,780 $18,441 $19,739 $20,538
Other $479 $710  $661 $1,070 $1,263

Data source: Page 14 of Amazon's Q3 2022 earnings press release.

Looking at the data above, let's isolate two viewpoints: Quarterly growth and annual growth. Comparing each sub-category to Q3 2021, investors can see that Amazon is generating growth across its entire business. Now, if we dilute this to quarterly growth throughout 2022, investors can also see that revenue is either growing, or in a worst-case scenario, is flat quarter over quarter.

If we zoom out, we should think about two things here. First, it's pretty amazing that Amazon is generating growth across its entire business in consecutive quarters, even during times of volatile economic activity. However, as pointed out above, revenue growth is only one component to keep in mind. While Amazon has generated consistent growth, it has also invested heavily in the business, and so not all these sub-categories are profitable.  

Where do we go from here?

Given the current economic climate and the financials above, freezing new hires and having layoffs is a tough, but necessary, reality. In an interview on CNBC, CEO Andy Jassy said that the layoffs would occur throughout the fourth quarter and carry into 2023. More specifically, he acknowledged that the cost reductions would be contained to Amazon's devices and services segment, as well as stores.

It's important to note that during this interview, Jassy assured investors that fulfillment workers would not be affected due to anticipated demand from the upcoming holiday season.

During the earnings call, Olsavsky stated: "We're also continuing to invest in new infrastructure to meet capacity needs, expanding to new geographic regions, developing new services and iterating quickly to enhance existing services."

As an investor, the above comment is encouraging. While management is admitting that the organization as a whole may be bloated, they're only reducing expenses in non-core initiatives. In other words, Amazon will continue to fund areas such as the cloud and advertising, both of which generate consistent growth and margin.

Amazon is currently trading roughly 2 times price-to-sales, or about half what it was trading at this time last year. As the stock trades near 52-week lows, it is tempting not to scoop up some shares.

In the long term, Amazon is a terrific, blue-chip stock to own. And given its current valuation, now is a great opportunity to lower your cost-basis. Long-term investors should keep a keen eye on the following earnings reports to ensure that management is executing on the cost reductions. Should these go according to plan, Amazon should recognize increased profits, which it can then use to stockpile cash or invest in growth areas when the time is right.