It would be an understatement to say that 2022 has not been kind to Amazon (AMZN -2.56%) investors, who have watched the e-commerce giant's stock lose almost 50% of its value.
In fact, after its big run-up during the onset of the pandemic, Amazon stock has been a bit of a bummer to own, first going nowhere in 2021 and then collapsing this year. As a result, it has become the first company ever to lose $1 trillion in market valuation.
So does that signal a buying opportunity for investors, or do they face even more pain in the future? Here's what investors need to know about this undoubtedly unique situation.
Image source: Amazon.
The primary pressure point
As one of the world's largest and most influential companies, it's obvious Amazon's e-commerce business has been the major driver of its growth. But the signs have also been clear that its sales strength is flagging.
One reason for the slowdown has been the rise of surprisingly effective competition in the e-commerce space. Amazon is no longer the only game in town; Walmart, Target, and even eBay have proved tougher than expected, making it difficult for Amazon to maintain its growth rates and market share.
Although Amazon naturally dominates the e-commerce space with a 39% share of the market, or more than the next 10 biggest competitors combined, Walmart owns the grocery space with a 25% share compared to just 1% for Amazon, according to Euromonitor data. While that includes both online and physical stores, it's arguably one of the most important segments of the market. And though Walmart badly trails on the general merchandise front, it has shown resilience and enjoyed 16% e-commerce sales growth in the third quarter, or nearly double its overall growth rate of 8.7%.
The high cost of doing business
Amazon, for its part, has also had a lot of catching up to do. For example, whereas Walmart had long had a vast retail footprint to serve as a distribution network when it decided to go all-in on e-commerce, Amazon had to launch into hurry-up mode to build out a physical logistics network to compete.
Over the past few years, the company has expanded its operations to include a vast network of warehouses, fulfillment centers, and delivery vehicles. While this has allowed Amazon to offer even faster, more convenient shipping to customers, once again upending the retail industry, the process has also come with significant costs. These infrastructure costs continue to weigh on its full profit potential.
Amazon admits it regularly experiences increases in its net shipping costs due to complimentary upgrades, split-order shipments, and ensuring timely delivery, particularly during the holiday season. Year to date, fulfillment costs exceed $61.2 billion, up 16% from the same point last year, and now represent 16.8% of sales, a 100 basis point increase from the year-ago period.
The real profit center
Historically high inflation is also taking a toll on consumer spending. And though high prices have eased somewhat, it continues to apply pressure on Amazon's sales and stock price.
Despite these challenges, Amazon has other businesses to fall back on that are performing well, most notably Amazon Web Services (AWS). The company's cloud computing platform has long been the primary source of profitability for Amazon. It is also expected to continue to be a growth driver in the future.
AWS's revenue continues to chug along, jumping 27% in the third quarter and standing 32% higher over the year's first nine months. Year-to-date operating profits of $17.3 billion are 33% higher year over year and comprise all of Amazon's operating income so far.
Image source: Getty Images.
Potentially bigger opportunities to come
Finally, it's worth considering the potential of Amazon's digital advertising business. The company has made significant investments in this area, and it has the potential to be a major growth driver. The digital advertising space is highly competitive, but Amazon is proving it can further differentiate itself from other players and potentially capture a significant share of the market.
Amazon is the place where almost everyone begins their search for a product, even more so than Alphabet's Google, and while most online sites saw third-quarter sales slump, Amazon's advertising revenue surged 25% to $9.5 billion.
Amazon also recently broadened its suite of advertising options for marketers to include things like more video as well as its Amazon Marketing Cloud, which lets clients connect their data to that which Amazon collects on its customers. It could be a powerful combination that will attract companies looking to reach customers reluctant to spend.
So is it a buy?
Amazon's stock doesn't look cheap at 80 times trailing earnings and 60 times next year's estimates. But at less than twice its sales, the e-commerce giant is trading at a sales-oriented valuation not seen since 2015.
Despite the negative headlines about its slowing retail business, Amazon remains the go-to place on the internet, while its diverse ancillary businesses give it a diverse portfolio of opportunities that provides a solid foundation for future growth.
