What happened

The S&P 500 is down by about 19% since Jan. 3, 2022, which puts it practically in bear market territory. But shares of Amazon (AMZN 0.90%) have fared far worse: They've dropped by 49% since then, and are now down 54% from their all-time high.

Explaining why such a complex company has suffered that sort of decline seems daunting. And yet, I believe looking at the company's operating income provides a simple explanation. And having understood this issue, the question of what Amazon's prospects look like in 2023 is more easily answered.

So what

Amazon is the largest e-commerce player in the U.S., it has an enormous logistics network, it has international operations, and operates a powerful cloud-computing platform, Amazon Web Services (AWS).

There are multiple things that could be talked about with each facet of Amazon's business just in terms of their developments in 2022. But zooming out to only observe Amazon's operating income over the past five years demonstrates that metric has an undeniable relationship with the stock price.

AMZN Chart

AMZN data by YCharts.

For experienced investors, this will come as no surprise: Profits drive stock performance over the long term. And operating income is one way to measure profitability.

For Amazon, AWS drives operating income to a greater degree than any other part of the business. In 2021, AWS generated operating income of $18.5 billion, up 37% year over year. And it accounted for 74% of Amazon's total operating income.

In 2022, however, the drag from the e-commerce operations was too big for AWS to overcome. Inflation caused expenses to go up, fulfillment centers were overstaffed, and management spent heavily on streaming-video content for Amazon Prime. Through the first three quarters of 2022, Amazon's North America division has recorded an operating loss of $2.6 billion, compared to operating income of $7.5 billion in the comparable period of 2021.

That $2.6 billion segment loss cast a dark shadow on an otherwise bright $17.6 billion in operating income for AWS.

As Amazon's operating income increased in 2020, so too did its stock price. But now that operating income is dropping, Amazon stock has sunk to a three-year low.

Now what

If the changes in operating income offer a simple explanation for the drop in Amazon's stock price, then a key question for investors is whether operating income can recover in 2023 and beyond.

This year, Amazon has an opportunity to improve when it comes to its North America e-commerce division. First, U.S. inflation appears to have peaked over the summer, which should make it less of a concern in 2023. Second, the company just announced another wave of layoffs, which will help it address its overstaffing issue.

However, there are some questions marks regarding AWS in 2023. In 2022's third quarter, its backlog of contracted revenue sat at $104 billion. But that was only up 4% from the previous quarter -- the slowest sequential growth it has reported for AWS's backlog.

Depending on how bad the economy gets and the timing of Amazon's contracts, AWS's growth could slow, impacting the operating income the segment generates. 

That said, a $100 billion backlog is nothing to sneeze at, and points to Amazon's ability to generate value beyond 2023. Therefore, even if the stock doesn't recover this year, I believe it will in due time.