While market downturns aren't enjoyable, they nevertheless present solid opportunities for investors. Plenty of companies get dragged down along with the broader market, sometimes regardless of their long-term prospects. This dynamic allows opportunistic buyers to pick up shares of solid corporations at a relatively low price. That's what investors should be looking to do right now.
After a terrible past year for the market, there are stocks with solid prospects that are down. In my view, one of the most exciting is none other than e-commerce giant Amazon (AMZN -1.01%). Here is why.
Amazon's cost-cutting efforts
Amazon lost about half its value in the trailing 12-month period as economic issues affected its operations.
Even the company's cloud unit, Amazon Web Services (AWS), hasn't been spared as businesses decreased cloud-related spending. AWS usually accounts for the bulk of Amazon's operating and net income, and it boasts much stronger margins than its e-commerce units. Naturally, inflation and supply chain issues hurt the health of Amazon's e-commerce.
The result has been lower revenue and earnings growth along with shrinking margins -- a rare combination for Amazon.
AMZN Profit Margin (Quarterly) data by YCharts
But the company isn't passively taking this beating. Amazon is implementing various measures to reduce spending. In a note released on Nov. 17, CEO Andy Jassy highlighted the company's decision to pause new hires and lay off workers in various parts of its operations.Some reports said there could be as many as 20,000 layoffs.
Elsewhere, Amazon scaled back its fulfillment network and put some of its unprofitable business ventures -- such as Alexa -- on the chopping block, all to improve its efficiency. The company plans on investing money into more profitable businesses moving forward.
Will these measures have an immediate effect on the company's bottom line? Maybe not, although we shouldn't ignore that possibility. But more importantly, the company is looking to fine-tune its business for long-term growth -- and not just for the current environment -- by controlling spending better and putting money where the return on investment is likely to be high. Amazon's business won't break under the current pressure. And zooming out helps give some perspective.
Its business has indeed slowed down recently, but that's only when comparing it to its abnormal pandemic highs. And as CFO Brian Olsavsky said during the tech giant's second-quarter earnings conference call: "Our compound annual growth since the start of the pandemic stands at 25%, a growth rate higher than what we were seeing prior to the pandemic."
Once things fully normalize, and the economy returns to normal, expect Amazon to improve its revenue growth rate and bottom line, thanks partly to the tweaks it is currently making within its business.
Plenty of opportunities ahead
Amazon has its hands in multiple businesses, from video and music streaming to e-commerce and cloud computing and more. Many of these industries still have plenty of whitespace ahead.
Consider e-commerce. According to some estimates, it accounted for 18.8% of global retail sales in 2021. That number will rise to 24% by 2026.
Amazon leads the e-commerce industry in the U.S. by some margin. It held a 37.8% market share as of June; the runner-up had a 6.3% slice of the pie. The story is similar with cloud computing, a market set to register a compound annual growth rate of 15.7% through 2030. Amazon is also the leader in this space.
While recent events have shown that the company isn't perfect and everything it touches doesn't necessarily turn to gold, Amazon still has an excellent track record. And in addition to its current businesses that still have plenty of growth left ahead, we can expect the company to find new profitable ventures. Perhaps it will be within healthcare, with the company's newest service in this massive industry, Amazon Clinic.
Or perhaps it will be some other opportunity. Amazon's track record of success is a crucial reason to remain a shareholder. That's before we look at the company's moat, including its solid brand name, high switching costs within AWS, and network effects in its e-commerce operations, as more merchants and customers attract more of each other onto the platform.
The reality of economic cycles will do little to derail Amazon. In my view, the tech giant will come out of the current period of economic turmoil an even better company, thanks to the measures it is taking to strengthen its business. And with the multiple growth avenues ahead, it will continue to reward shareholders for a long time, just like it did before the pandemic.
