If you are anything like me, you can't wait for 2022 to end. For the investment community, the year has been a nonstop drop tower. And no index felt the pain more than the growth-focused Nasdaq, down 28% year to date. Amazon (AMZN -1.11%) has fared worse by shedding 45% of its value in that timeframe.
Let's explore two reasons the embattled tech giant could bounce back from its near-term challenges and reward patient investors.
1. The AWS slowdown looks temporary
By now, most people are familiar with the much-talked-about slowdown in Amazon's e-commerce segment, which is one of many stay-at-home winners facing difficult comps and overexpansion after the boom years in 2020 and 2021. What is less highlighted, however, is the weakness in cloud services, which now make up 15% of Amazon's revenue and practically all of its operating income amid losses in the other reporting segments.
Amazon Web Services (AWS) grew by 27% in the third quarter to $20.5 billion. And while that is healthy growth for such a large business, it represents a sharp deceleration from the 39% growth generated this time last year.
According to management, the deceleration in the cloud business has a lot to do with customers cutting costs -- for instance, moving to lower-priced cloud service options that generate less revenue. But while this is obviously bad news in the short term, it suggests that AWS is simply going through a down cycle instead of a secular decline and could quickly bounce back when macroeconomic conditions improve.
2. Potential expansion into new businesses
A possible cloud recovery isn't the only thing that should make Amazon investors sleep better at night. The company's massive scale allows it to forge strong economic moats in synergistic industries that could become valuable long-term growth drivers. Digital advertising is one such opportunity.
Image source: Getty Images.
With over 300 million users, Amazon has a massive captive audience motivated toward shopping. And their search and purchase behavior can become a goldmine of data that can be used to target ads to the most receptive consumers. Perhaps more importantly, Amazon can integrate ads directly into the user experience, allowing small businesses to pay to have their products featured near the top of search results.
In the third quarter, Amazon's advertising business grew 25% to $9.5 billion. And while this number probably isn't enough to move the needle just yet, it introduces much-needed diversification and growth potential to the company's revenue streams.
Focus on the long term with Amazon stock
Amazon is a cyclical company that probably won't escape from recessions unscathed. While that is bad news in the short term, the good news is that its long-term prospects remain intact. Management believes the global economy is at the early stages of transitioning to cloud-based storage and data solutions. And Amazon's natural advantages in scale and targeting make it an inevitable winner in digital advertising.
After shedding almost half its value in 2022, Amazon's near-term challenges look priced in. And the stock looks positioned for a healthy bull run when macroeconomic conditions improve.
