In May 2021, e-commerce giant Amazon (AMZN 0.20%) was valued at almost $1.9 trillion. But amid the sell-off in the broader tech sector, the company's stock has declined by more than 50%, and its valuation has dipped to just $900 billion.
High inflation and rising interest rates have crushed consumers' spending power, which has been a drag on Amazon's biggest revenue driver: its retail business. But the company is still generating robust levels of growth, particularly in some of its emerging business units, so the decline in its stock price presents a unique long-term opportunity.
Here's why investors should consider taking advantage.
Amazon's advertising business is bucking the industry slowdown
When consumers are feeling the financial pinch, businesses tend to pull back on their marketing initiatives because they expect a lower return on their investment. As a result, many technology companies that rely on advertising dollars have experienced abrupt slowdowns in their growth rates this year. Facebook parent Meta Platforms and Snap are two prime examples.
Amazon has some serious digital real estate, which opens the door to a plethora of opportunities for advertisers. Its flagship e-commerce website attracts more than 2.5 billion hits per month, which makes it ideal for businesses trying to reach online shoppers.
And the company continues to grow its streaming presence via its Prime platform, including with valuable sports rights to the NFL's Thursday Night Football. The first broadcast of the season drove the strongest three hours of new Prime subscriptions ever.
The streaming industry is experiencing a shift to ad-supported content, including at Netflix, which is one of the most dominant players. Over time, Amazon will likely be able to monetize more of its assets through ads. But even at this stage, in the recent third quarter (ended Sept. 30), the company's ad business grew at the fastest pace of 2022 so far.
E-commerce is slowly bouncing back
Amazon's net domestic and international sales, which include everything except its cloud services business, Amazon Web Services (AWS), still account for more than 83% of the company's total revenue. Therefore, a slowdown is to be expected in this economy, given its reliance on consumer spending.
During the first six months of 2022, Amazon's North American sales grew just 9% year over year with international sales declining 9%. However, there was a strong improvement in those figures in the third quarter with North American sales jumping 20% and international dipping 5% (a decline resulting from foreign-exchange headwinds as international grew 12% on a currency-neutral basis).
Interestingly, there are signs inflation peaked in June when it famously hit a 40-year high, because it has ticked down in each month since then. Therefore, it's possible Amazon's third-quarter accelerating growth coincided with slightly more favorable conditions for consumers.
In any case, the company hasn't stopped investing in growth opportunities. It opened 12 new fulfillment centers in the quarter and expanded its geographic footprint by entering Belgium. Plus, it continues to onboard high-profile retailers to its marketplace, including exercise equipment company Peloton Interactive.
Why Amazon's drop in valuation is a big opportunity
Amazon Web Services (AWS) remains the profitability engine behind the entire company. It generated $17.6 billion in operating income during the first nine months of 2022, whereas the rest of Amazon's business reported a combined operating loss of $5.5 billion.
Why is that important? The cloud industry is on track to exceed $1.5 trillion in annual value by 2030, and AWS is already the market leader by revenue and scope of services. As companies continue to shift more of their operations online and tap into more digital sales channels to serve their customers, cloud services providers like AWS will continue to reap significant rewards. We may still be in the very early innings of this growth story.
Amazon also has a stake in electric vehicle maker Rivian Automotive. Amazon is Rivian's largest customer as the tech giant aims to completely electrify its fleet of delivery vans by 2030 with 100,000 vehicles. More importantly, it's yet another maneuver by Amazon to capture value from emerging industries for shareholders, similarly as it did with AWS -- and that bet paid off handsomely.
Consider this: In the face of an incredibly weak economy, Amazon grew its company-wide top line 15% last quarter to $127.1 billion, and the number would've been 19% if the U.S. dollar weren't so strong. Amazon's scale allows for weakness in certain parts of the business, because at least in this case, areas like advertising and the cloud swooped in to pick up the slack.
This is a company that sits in a great position to rebound when the economy eventually recovers, and if the worst of inflation is truly behind us, that could happen as soon as 2023. If that's the case, investors might regret not buying the 50% dip in Amazon stock right here, especially over the long term.
