Amazon's (AMZN 0.55%) stock fell 8% on Feb. 3 after the e-commerce and cloud giant posted its fourth-quarter report. Its revenue rose 9% year over year to $149.2 billion, which beat analysts' estimates by $3.4 billion. But its net income plunged 98% to $0.3 billion, or $0.03 per share, and missed the consensus forecast by $0.14. Excluding a $2.3 billion loss from its stake in the electric vehicle (EV) maker Rivian (RIVN 3.70%), Amazon's net income would still have declined 82%.
For the full year, Amazon's revenue rose 9% to $514 billion, but it racked up a net loss of $2.7 billion. That marked a major slowdown from 2021, when Amazon's revenue and net income grew 22% and 57%, respectively.
Image source: Amazon.
Yet that deceleration also wasn't too surprising, since both of Amazon's core businesses faced tough macro and currency challenges over the past year. That's why Amazon's stock declined about 25% over the past 12 months and remains more than 40% below its all-time high. Should investors accumulate more shares of Amazon before the bulls rush back?
How rough was Amazon's slowdown?
In 2022, 61% of Amazon's revenue came from its North American business, 23% came from its International business, and the remaining 16% came from its public cloud infrastructure platform Amazon Web Services (AWS). Amazon's North American sales growth held steady over the past year, but its international sales declined (mainly due to currency headwinds) as AWS' growth cooled off every quarter.
|
Metric |
Q4 2021 |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
|---|---|---|---|---|---|
|
North America sales growth (YOY) |
9% |
8% |
10% |
20% |
13% |
|
International sales growth (YOY) |
(1%) |
(6%) |
(12%) |
(5%) |
(8%) |
|
AWS sales growth (YOY) |
40% |
37% |
33% |
27% |
20% |
|
Total sales growth (YOY) |
9% |
7% |
7% |
15% |
9% |
Data source: Amazon. YOY = Year-over-year.
AWS' slowdown is alarming because it was Amazon's only profitable business in 2022. For the full year, its $22.8 billion in operating profits offset the operating losses in the North American and International segments -- which enabled Amazon to squeeze out a total operating profit of $12.2 billion. Unfortunately, that operating profit still trickled down to a net loss of $2.7 billion after factoring in a $12.7 billion loss from Amazon's equity stake in Rivian and other expenses.
Will AWS' growth stabilize soon?
Amazon usually subsidizes the growth of its lower-margin retail businesses with AWS' profits. That's how it's able to sell its products at such low prices, maintain the growth of its brick-and-mortar stores (including Whole Foods), and expand its Prime ecosystem with new loss-leading devices and services. If that core growth engine stalls out, Amazon will struggle to operate at a profit as it expands. Amazon's determination to retain its stake in Rivian -- which plans to supply the company with a full fleet of 100,000 electric delivery vans by 2025 or 2026 -- will put even more pressure on AWS.
During the conference call, CFO Brian Olsavsky attributed AWS' slowdown to tough macro conditions which forced "enterprises of all sizes" to optimize their cloud spending. Olsavsky expects those "optimization efforts" to generate headwinds for AWS for "at least the next couple of quarters." That slowdown could be ugly: Olsavsky noted that in the first month of 2023, AWS' year-over-year revenue growth had already cooled off to the "mid-teens."
But it's not all bad news
On the bright side, Amazon isn't sitting still and letting AWS' cyclical slowdown consume its other businesses. It's aggressively cutting costs, as seen in its recent decision to lay off 18,000 workers, and shutter some of its weaker brick-and-mortar stores. It's still expanding its online grocery business, which Olsavsky believes will "scale meaningfully over time."
Amazon noted that while inflation remains a major challenge, it was partly offsetting its slower sales of discretionary products with stronger sales of lower-priced items, value brands, and everyday essentials. That mix should improve as inflation is gradually reined in and the macro environment improves.
As for its stake in Rivian, Olsavsky reminded investors that its equity-related losses were "not related to Amazon's ongoing operations but rather the quarter-to-quarter fluctuations in Rivian's stock price." Rivian's stock currently trades nearly 75% below its IPO price -- so any positive developments for the EV maker could significantly boost Amazon's reported profits.
Is it the right stock to buy now?
For the first quarter of 2023, Amazon expects its revenue to rise 4% to 8% year over year and for its operating profit to drop 46% at the midpoint. For the full year, analysts expect its revenue to rise 9% and for its earnings to turn positive again -- but the latter estimate could depend heavily on Rivian's performance.
At $100, Amazon might seem a bit pricey at 63 times this year's earnings. But if we look at its top line, which might matter more until its near-term profits stabilize, it arguably looks cheap at less than two times this year's sales. I don't expect Amazon's prospects to improve anytime soon, but I think it's still a solid long-term play for investors who believe it will remain the world's top e-commerce and cloud company for the foreseeable future.
