Online shopping had been a double-digit growth retail category for years, but the pandemic made almost everyone a digital shopper nearly overnight. As the economy has reopened, though, e-commerce has taken a step back as people return to in-person shopping trips.
It seems that sluggish e-commerce spending could persist into 2023, implying that the pandemic pulled forward years' worth of growth for the digital retail space. That sounds like a bad omen for digital commerce leader Amazon (AMZN +1.63%).
Is it time to ditch shares of the tech giant?
NASDAQ: AMZN
Key Data Points
Amazon's e-commerce isn't the same as everyone else's
According to data collected by the U.S. Census Bureau, e-commerce sales in the U.S. steadily gobbled up market share of overall retail for two decades. There was a sharp spike in digital shopping in early 2020, but since then, e-commerce has languished and remains down from its peak in terms of total retail market share.
Data source: U.S. Census Bureau and Federal Reserve Bank of St. Louis.
Nearly three years later, digital commerce may still not recapture its highs anytime soon. As shared by PayPal recently at a digital payments investor event, e-commerce spending appears to have been roughly flat in Q4 2022 compared to the year prior. And with consumers under pressure from inflation and a deteriorating economy, PayPal isn't optimistic that will change much in the first half of 2023. Households are tightening their belts a bit on discretionary spending.
However, Amazon's e-commerce empire differs a bit from the typical retailer's. Amazon doesn't simply sell "stuff." Lumped in with its North America and International segments are things like the Prime subscription service, a thriving digital advertising business, various entertainment offerings like TV and music, and of course, physical stores (primarily Whole Foods) that are making a comeback.
Thus, while the sale of actual merchandise has been sluggish for Amazon through the first nine months of 2022, services (including Amazon Web Services, or AWS -- more on that momentarily) remain in strong growth mode. In Q3 2022 alone, advertising ($9.55 billion in revenue) and third-party seller services ($28.7 billion revenue) did particularly well with a respective 25% and 18% year-over-year increase.
|
Amazon Basic Revenue Segment |
First Three Quarters of 2022 |
YoY % Growth |
|---|---|---|
|
Product sales |
$172 billion |
1.2% |
|
Services |
$192 billion |
19% |
Data source: Amazon.
The real moneymaker for Amazon
This is great news for Amazon investors. Although reports about a lackluster holiday spending season and economic woes for 2023 don't sound great, the company is still growing its online consumer business in other areas.
In fact, the peddling of merchandise isn't all that lucrative. Retail profit margins tend to be a low- to mid-single-digit percentage business at best. Instead, Amazon's product sales should actually be viewed as a gateway to more lucrative lines of business, like advertising and Prime entertainment services.
And of course there's the real moneymaker right now, AWS. Although the public cloud computing segment's growth has also slowed as of late (27% year-over-year growth last quarter, compared to better than 30% in previous periods), AWS still accounts for essentially all of Amazon's profitability, since operating income from the e-commerce side was a wash last quarter. AWS generated all $4.9 billion of Amazon's total operating income in Q3 2022.
The market is in a fragile state right now, so any perceived weakness in Amazon's business -- product sales or otherwise -- are likely to cause some extreme turbulence in the stock price. Nevertheless, reports of weak digital commerce industry performance are no reason to sell Amazon stock. The tech giant is extending its platform in new directions and still realizing plenty of growth as a result.
