Last year was pretty painful for some of the world's top companies -- including one of the most popular names on the planet. I'm talking about Amazon (AMZN 0.63%). Rising inflation tore into earnings and stock performance, and the e-commerce giant finished the year with a decline of nearly 50%.
The question that's now on every Amazon investor's mind and the minds of potential investors is: Will Amazon recover in 2023?
It's impossible to look into a crystal ball and find the answer to this question, but we can take a closer look at this market leader and gather a few clues. Let's check out the Amazon story -- and find out whether it's a stock to buy now.
A look into the past
First, let's take a look into the past. Amazon was going strong prior to the pandemic and during most of the health crisis. Before the emergence of the coronavirus, the company continued to expand its two big businesses: e-commerce and cloud computing. Amazon added members to its Prime subscription program worldwide, and Amazon Web Services (AWS) added new infrastructure locations for its cloud services and gained new contracts.
Business continued to thrive during most of the pandemic. Shoppers preferred staying home and buying online. And companies were happy to hire AWS to manage their data storage rather than do it themselves.
But in late 2021, rising inflation started to hurt Amazon in two ways. First, it raised the company's costs on everything from transporting goods to running warehouses. Second, it started weighing on customers' wallets. That means shoppers had less money to spend on Amazon. And in more recent times, companies even started to scale back spending on cloud services.
As a result, Amazon has been reporting declines in operating income and operating cash flow. The company's free cash flow also shifted to an outflow. And overall operating margin in the third quarter narrowed to about 2% from 4.4% in the year-earlier period.
All of this sounds grim. But here's why there's reason to be positive about Amazon. First, Amazon's net sales continue to rise. Sales climbed in the double digits in the third quarter, and AWS net sales and operating income rose in the double digits, too. This shows customers still are turning to Amazon -- even if they have less money to spend.
Using tough times wisely
Second, Amazon has been using these tough times as an opportunity to adjust its cost structure and invest in its strongest growth areas. The cost cuts should eventually translate into gains in earnings. And the move to increase investment in cloud computing by $10 billion for the full-year 2022 should help AWS increase revenue down the road.
It's also important to remember the e-commerce and cloud computing markets are growing in the double digits. Amazon's leadership position should help it benefit from this growth over time.
Finally, we should keep in mind that times of rising inflation and general economic woes don't last forever. We've been through them before. Companies with track records of growth, leadership in their markets, loyal customers, and solid growth prospects have what it takes to make it through these periods -- and go on to thrive. Amazon easily fits into this category.
When will recovery happen?
Let's get back to our question: Will Amazon recover this year? This depends on the general economy's speed of recovery and the time it takes for improvements, like lower costs, to enter into Amazon's earnings picture. Of course, even signs of an economic rebound could boost Amazon shares.
But as I mentioned earlier, it's impossible to predict the timing of earnings and share-price recovery. So what does this mean for investors?
Even if we can't pinpoint the exact timing of a rebound, Amazon still is a buy today, for all of the strengths I mention above. The company's long-term earnings outlook remains attractive. Considering that, Amazon looks cheap right now, as it trades at less than two times sales.
All of this means, whether Amazon rebounds in 2023 or later, investors still are likely to win big over time.
