It's finally 2023 -- an end to a horrific year for Amazon (AMZN 0.27%), which saw its share price collapse by 50% in 2022. While the company will face near-term headwinds in its e-commerce business, the long-term future looks bright.
With that said, let's discuss why investors might want to bet on the beaten-down tech giant in 2023.
What went wrong for Amazon in 2022?
Like many e-commerce companies, Amazon surged during the COVID-19 pandemic when lockdowns and movement restrictions led to an online shopping boom. But as the crisis wound down, Amazon found that it had over-expanded in anticipation of growth that wouldn't materialize. Further challenges like inflation also hurt its operations by eroding customer spending power while increasing the cost of doing business.
In the third quarter, net sales grew by 15% to $127.1 billion. While this number is nothing to scoff at for such a large company, the bottom line is significantly weaker than in prior periods. Total operating income dropped 49% to $2.5 billion as the margin-eroding challenges took their toll.
As usual, Amazon's cloud computing business, Amazon Web Services (AWS), is helping pick up the slack from domestic and international e-commerce. But while AWS managed to grow its sales by 27% to $20.5 billion, this is a significant deceleration from the 39% growth rate it recorded in the prior-year period. AWS adds nice diversification to Amazon's revenue streams, but it is not completely immune from the macroeconomic challenges battering the rest of the company.
Why does the future look bright?
For better or worse, the 2022 bear market has demonstrated that Amazon's businesses are more cyclical than many investors may have expected. During uncertain economic times, AWS clients might delay their cloud migrations or switch to lower-priced service tiers to save money -- a process Amazon's management called "cost optimization" in its third-quarter earnings report. Challenges like rising fuel costs, wage inflation, and weakening consumer confidence also hurt e-commerce.
The good news is that cycles don't last forever. And Amazon's long-term thesis remains intact because its massive scale gives it an economic moat, which is a competitive advantage over rivals in the same industry.
E-commerce adoption is a secular megatrend that will likely continue as technology and logistics infrastructure improves. And Amazon's management believes public and private organizations are at the early stages of transitioning to cloud-based data storage and services.
Amazon is also working on new growth drivers that could help ensure its long-term success and diversification. In March 2022, the company acquired MGM Studios for $8.5 billion, gaining access to a library of 4,000 films and 17,000 TV episodes, and the talent and industry connections to claim a bigger slice of the global box office. Amazon plans to spend $1 billion to produce 12 to 15 films annually.
Investing in a bear market
Investing in a bear market is tricky because no one wants to try to catch a falling knife. While macroeconomic challenges like inflation seem to be easing, it is still unclear how high the Federal Reserve will need to raise rates or if the U.S. will enter a recession in 2023.
But over the long term, Amazon looks like a winner. E-commerce and cloud computing are still growing industries where Amazon boasts a strong moat. And the company is working hard to expand and diversify its business into new opportunities like film entertainment.
