The global pandemic that began in earnest in March 2020 rocked the world economy. As businesses and people hunkered down, it became clear that a few companies stood to benefit from the rapid adoption of online shopping. The government also provided seemingly endless stimulus, and interest rates were slashed to zero.
The wave of consumer spending that followed caused Amazon's (AMZN +0.61%) stock price, sales, and profits to soar.
NASDAQ: AMZN
Key Data Points
As the pandemic faded, economic conditions boomeranged, and several challenges ensued, such as:
- An arduous labor market forcing the company to absorb billions in costs for wage increases, bonuses, and COVID-19 mitigation.
- Record inflation crimping profit margins and consumer spending growth.
- Logistical bottlenecks adding costs to the bottom line.
- A potential recession further rattling consumers in 2023.
Two of Amazon's three segments, North America and International, posted heavy losses, while the Amazon Web Services (AWS) segment became the saving grace.
Wow, that's a lot of lousy news. But long-term investors know better than to focus exclusively on current headlines. Two hundred million Prime subscribers, a mammoth portion of the U.S. online shopping market, and the leading cloud services provider demand it.
Let's look at what Amazon has on tap and why the stock's slide could be an opportunity.
Sales are up; profits are down
After exploding in 2020 and 2021, Amazon's sales growth slowed, but it hasn't stopped. As shown below, the company is on track for record sales of well over $500 billion this year.
Data source: Amazon.
Amazon continues to dominate the lucrative U.S. online retail market with 38% of the market, according to Statista. Walmart is a distant second place at just 6.3%. Competitors have been trying to hedge into this space for years, but Amazon is rolling on. As mentioned, with more than 200 million global Prime members, this isn't likely to change soon.
The costly economic headwinds caused operating profits to drop from $21.4 billion through the third quarter of last year to just $9.5 billion this year. This pattern will likely continue into 2023 as the Federal Reserve grapples with inflation.
However, there are signs that inflation is finally cooling. With record sales, if Amazon reverts to recent profit margins once the economy gets back on track, profits could reach record levels in the coming years.
What does the future look like?
Amazon's service sales outpaced product sales this year for the first time in its history. Services include Prime memberships, digital advertising, AWS, and fees from third-party sellers. This is terrific news for the future because services tend to have much higher margins than product sales. AWS, for instance, has a 30% operating margin this year.
The various revenue streams from services are depicted below. In Q3, these services achieved a combined 20% growth year over year (YOY).
Data source: Amazon.
Advertising services enjoyed a particularly impressive rise. Just $12.6 billion was earned in 2019, and Amazon is on track to more than triple that figure this year.
Amazon's foray into broadcasting NFL Thursday Night Football also was a success. The first game drew 15 million viewers and spurred a record number of Prime membership sign-ups during the game. The broadcast deal is for 11 seasons and enhances Amazon's entertainment offerings.
Finally, AWS continues to shine. The cloud services provider commands the global market with a 34% share. Our reliance on the cloud makes AWS an essential part of the economy. Sales rose from $35 billion in 2019 to a run rate of over $80 billion now. Growth could dip in 2023 as companies tighten their belts, but beyond that, the marketplace is expected to grow 16% compounded annually through at least 2027.
Buy straw hats in the winter
Amazon has had a tough time of late. 2023 won't be easy either, but the long-term potential remains tremendous. The stock's 50% decline this year could be an opportunity for long-term investors. After all, we don't beat the market buying just while things are great; lasting profits are made by buying when others run away.
