Amazon's (AMZN -2.56%) stock market rally came to an abrupt halt last week following the Feb. 2 release of the company's fourth-quarter 2022 results. The tech giant's earnings fell way behind analysts' expectations, and its cloud business grew at a slower-than-expected pace, which led the company to deliver a muted forecast for the current quarter.
As a result, investors were quick to press the panic button. However, shares of the company are up 19% year-to-date even after that post-earnings slide, thanks mainly to the impressive momentum Amazon gained in January amid the broader market rally. Should investors capitalize on this drop and buy Amazon stock in anticipation of more upside? Or will the e-commerce and cloud computing giant continue to slide? Let's find out.
Addressing the elephant in the room
Amazon's fourth-quarter 2022 net sales increased 9% year over year to $149.2 billion, exceeding the $145.4 billion consensus estimate and surpassing management's own high-end guidance of $148 billion. However, the company's net income dropped to just $0.03 per diluted share from $1.39 per diluted share in the prior-year period on account of shrinking margins in the Amazon Web Services (AWS) segment, as well as severance costs attributed to the massive layoffs that the company announced in recent months.
The weaker-than-expected performance of the AWS segment, however, spooked Wall Street. AWS sales were up 20% year-over-year to $21.4 billion, slightly below the consensus estimate of $21.87 billion. This was the fourth straight quarter of slowing AWS growth. It is worth noting that AWS revenue increased 40% year over year in the fourth quarter of 2021, but weak macroeconomic conditions led the company's cloud customers to scale back spending in the following quarters.
The bad news is that because headwinds are likely to persist for "at least the next couple of quarters," as CFO Brian Olsavsky pointed out on the latest earnings conference call, AWS may lose more steam in the short-term. Management, however, is confident about the overall health of the AWS business, with Olsavsky adding that the "new customer pipeline remains healthy and robust, and there are many customers continuing to put plans in place to migrate to the cloud and commit to AWS over the long term."
The good news for Amazon is that global spending on public cloud services is expected to increase in 2023 by nearly 21% to $592 billion. That would be an improvement over last year's growth of almost 19%. If cloud spending improves in the second half of the year, investors can expect an acceleration in AWS revenue once again, given Amazon's dominant position in this space.
Amazon is facing headwinds in e-commerce as well
While Amazon's North American e-commerce revenue increased 13% year over year last quarter to $93.5 billion and accounted for the biggest chunk of its top line, sales in the international e-commerce business fell 8% over the prior-year period to $34.5 billion. Additionally, the company hasn't been able to crack the grocery market, and has decided to pause the expansion of Amazon Fresh stores until it finds a profitable formula in this sector.
Inflationary pressures and high interest rates have weighed on customer spending, and this is reflected in last quarter's mixed e-commerce performance. That slowdown isn't terribly surprising, though, given that, according to eMarketer, global e-commerce sales reportedly increased only 9.7% in 2022 following a 17.1% jump in 2021. But with worldwide e-commerce revenue expected to accelerate by 10.4% in 2023, Amazon could benefit from easier comparisons in this market.
All said, a potential turnaround in cloud computing and a relatively strong e-commerce performance could be tailwinds for Amazon in 2023. Amazon expects first-quarter 2023 revenue to increase 6% year over year at the midpoint of its guidance range to $123.5 billion. It also anticipates an operating income of $2 billion at the midpoint, which would be a sharp drop from $3.7 billion in the year-ago quarter.
This indicates Amazon stock may remain under pressure in the near term. But investors should also note that there is the possibility of a turnaround at Amazon thanks to cloud computing demand, e-commerce growth, and other emerging catalysts that could help this tech stock regain its mojo. As Amazon is trading at just over 2 times sales, compared to the S&P 500's sales multiple of 2.4, savvy investors may want to accumulate the stock given its attractive valuation and a potential improvement in the company's prospects later this year.
