Amazon (AMZN -0.58%) continues to experience pressure in its operations, and that was borne out again in another mixed earnings report that demonstrated slow growth and falling operating income. Amazon stock fell after the report, but it's up 19% so far in 2023. How can investors interpret mixed signals, and should you buy now before a bull market sweeps in?
What went wrong
A 9% year-over-year sales increase could hardly be called something going significantly wrong. That was above its guidance of 2% to 8% for the 2022 fourth quarter. Operating income of $2.7 billion was above the midpoint of its $0 to $4 billion guidance, although it was down from $3.5 billion last year.
Amazon posted $300 million in net income, a significant drop from last year, and a net loss for the full year. For several quarters, the company's bottom line has been impacted by pre-tax valuation gains or losses related to its investment in Rivian Automotive, making this metric less valuable as a measure of how well Amazon is operating.
AMZN Net Income (Annual) data by YCharts
Still, growth is slowing and operating income is declining. These are both affected by the macroeconomic environment of inflation and rising costs. That affects the top line as people scale back spending, and it affects the bottom line as costs increase for Amazon.
One particular standout, not in a good way, is a continued slowdown in cloud-computing segment Amazon Web Services (AWS). AWS has been a reliable sales and income generator even as e-commerce has hit some snags, but it's also showing signs of pressure now. AWS sales increased 20% over last year in the fourth quarter.
But clients are scaling back or delaying cloud investments as they seek to cut down their own operating costs. Competitor Microsoft's cloud business grew 22% over a similar time period, but Alphabet's cloud business increased 32% in the fourth quarter.
It's important to keep in mind, though, that AWS already dominates the industry and accounts for a whopping 34% of the total market, whereas Microsoft has 21% and Alphabet has only 11%.
Management said that it expects slow growth for AWS over the coming quarters as well as clients continue to rein in spending.
CFO Brian Olsavsky also said that Amazon would be closing physical stores that have "low growth potential." Amazon has been trying to meaningfully break into physical retail for years without strong success.
What's going right
With that exhausting list, investors need to keep in mind that Amazon is a huge business with a lot of moving parts, and there was plenty of progress, too. For one thing, transportation costs are coming down, which will contribute to better operating margins in the coming quarters.
Third-party sellers accounted for 59% of total sales, and that number has been climbing. Third-party sales are a low-cost contribution to the total.
Advertising sales increased 23% over last year (on a currency neutral basis), and that's a growing area with a lot of potential for Amazon.
As for AWS, although management is anticipating continued slow growth for the time being, it also said there was a robust pipeline of customers for its cloud services. It anticipates growth to strengthen when the economy improves.
Amazon has an enormous edge over other companies with its innovation and culture and varied revenue sources. As e-commerce slows down, and even AWS begins to decelerate, other businesses are carrying more of the weight.
Is now the time to buy?
If you're looking for quick gains, Amazon may not be the right stock for you. There's no way to know when the bull market is going to return -- or when individual stocks will make up or down movements.
Some stocks look like they have everything going for them right now, which makes it likely that their prices will rise this year. I can't put Amazon in that box, because there are too many unknowns, and Amazon still has plenty of fires to put out before its financials look more compelling.
What I can say with more certainty is that, long term, Amazon has winning prospects. I don't recommend looking for short-term price movements because you can't time the market and you don't want to stress over your stock portfolio. You have a much better chance of investing success if you identify quality companies and buy -- and hold -- their stocks. That's why I feel very comfortable recommending Amazon stock.
At its current price, Amazon looks like a good value right now as well. Because it posted its first annual net loss since 2014 (and a much bigger one), you can value it with the price-to-sales ratio instead of the price-to-earnings ratio. Amazon stock trades at only 2 times trailing-12-month sales, which is incredibly cheap.
Now certainly looks like a great time to buy the shares if you can hold on for the long term, and you''ll benefit even earlier if a bull market breeds investor confidence and stock prices go up.
