The 2022 bear market will go down in the history books for humbling some of America's biggest companies. Amazon (AMZN +0.55%) and Disney (DIS 0.59%) didn't escape unscathed. Down 33% and 23% over the last 12 months, both companies trade at dramatic discounts to previous highs. Let's discuss why they could overcome these near-term challenges and generate long-term value for patient investors.
Amazon
After a tumultuous 2022, Amazon is in recovery mode. While the company faces challenges in its core e-commerce and cloud businesses, these headwinds don't destroy its long-term thesis.
Like many technology-related companies, Amazon soared during the worst of the COVID-19 pandemic, when stay-at-home shopping boosted demand for its industry-leading e-commerce platform. But under former CEO Jeff Bezos, the company over-expanded -- hiring new workers and building out logistics infrastructure in anticipation of future growth that didn't arrive. On the cloud computing side, AWS customers are opting for cheaper service plans to save money amid rising rates and high inflation.
NASDAQ: AMZN
Key Data Points
These headwinds led Amazon's operating profit to fall 49% to $2.5 billion in the third quarter. That said, this is a speed bump, not a roadblock. Amazon still enjoys its economies of scale and network effects -- which are the benefits a platform gains the more people use it.
Management has already announced significant layoffs, which should help cut costs in the e-commerce segment. And cloud computing growth can be expected to pick up when macroeconomic conditions improve. With a price-to-earnings (P/E) multiple of 86, Amazon's shares are pricier than the S&P 500 average of 21. While the premium looks high, it doesn't tell the total story. Considering Amazon isn't operating at its full profit potential right now, the PE ratio should come down as earnings improve.
Walt Disney
Walt Disney is another mega-cap company trying to regain its mojo in 2023 and beyond. The strategic decisions of its former CEO, Bob Chapek, may have led to deteriorating profitability and widespread investor pessimism. But the company's economic moat remains strong.
Like Bezos, Disney's Chapek might have drawn the wrong conclusions from the COVID-19 pandemic. Under his leadership, the entertainment giant threw everything behind streaming, spending vast sums to create content and capture market share. To some extent, the strategy worked. With almost 236 million subscribers across all its platforms, Disney is the top streaming company on the planet -- ahead of Netflix, which only boasts 231 million. But there is a big problem: Disney's streaming segment isn't profitable. In fiscal 2022, the segment had an operating loss of $4 billion.
NYSE: DIS
Key Data Points
However, investors should keep things in context. Netflix generated an operating income of $5.6 billion in its corresponding period. And with its similar business model and larger subscriber base, it may only be a matter of time before its streaming business closes the gap.
Disney's treasure trove of intellectual properties (such as Star Wars and the Marvel Cinematic Universe) gives it a strong economic moat, which it can use to keep creating attractive content and have room to raise prices while maintaining market share. With a forward P/E of 25, the company's stock doesn't trade at a significant premium to the market average.
Betting on strong moats
Amazon and Walt Disney are seeking to bounce back in the post-pandemic economy. Both seemed to have bet too heavily on the stay-at-home surge and are now paying the price for their overexpansion. That said, they can recover from past mistakes because of their deep economic moats and sustainable long-term growth drivers. Now might be a good time for investors to buy these quality stocks at a discount.
