Down 35% over the last 12 months, the stock of Amazon (AMZN 0.87%) has been a roller coaster ride for investors. Shares in the global e-commerce platform briefly recovered in 2023 before losing significant value after weaker-than-expected earnings.
That said, Amazon's long-term thesis remains strong, and now could be an excellent time to buy the stock on the dip. Here are two reasons.
1. Macroeconomic conditions could be easing soon
While it is too early to call the end of the Nasdaq bear market, there seems to be light at the end of the tunnel. While interest rates are currently high, inflation is failing. This could encourage the Federal Reserve to ease off its restrictive monetary policy without tipping the U.S. economy into recession -- a scenario often called a "soft landing."
For Amazon and other growth-oriented stocks, this is a huge green light because Fed policy affects investors' willingness to pay premiums for their future earnings and cash flow. And a recession would be bad news from an operational standpoint. The market is happy to see that both headwinds might not be as severe as previously expected.
NASDAQ: AMZN
Key Data Points
2. Amazon is a cyclical company
While Amazon's equity price seems to be benefiting from marketwide tailwinds, its recent business performance during its fourth quarter ended Dec. 31, 2022 left much to be desired. Net sales increased 9% year over year to $149.2 billion, driven by expansions in North American e-commerce and cloud computing, which helped defray a significant contraction in international e-commerce. Net income collapsed 98% from $14.3 billion to just $300 million.
This is an alarming result. But investors should look at things in the proper context. Amazon's business is cyclical, which means it is highly sensitive to changes in macroeconomic conditions -- including inflation and rising interest rates, which can hurt consumer confidence.
Image source: Getty Images.
And while the global economy might skirt a recession, many businesses are choosing to behave more cautiously by delaying their enterprise cloud migrations or switching to lower-priced service tiers, leading to a slowdown in Amazon Web Services (AWS) revenue.
Over the long term, e-commerce and cloud computing both remain growth opportunities for Amazon. Management believes public and private enterprises are still in the early stages of migrating their computing needs to the cloud.
And in 2023, Amazon expects to roll out its e-commerce platform to new markets in Latin America and Africa. The company's scale gives it the cost efficiencies and network effects to continue outdoing industry rivals.
Is Amazon still a good deal?
With a price-to-earnings multiple of 68, Amazon stock doesn't look particularly cheap compared to the S&P 500 average of 22. But investors should remember that as a cyclical company, its current earnings are unusually low and don't necessarily represent its long-term profit potential.
Despite near-term challenges, Amazon remains one of the best ways to bet on the long-term expansion of e-commerce and cloud computing, and shares still look like a buy for patient investors.
