E-commerce specialist Amazon (AMZN -1.34%) has arguably been one of the best investments on Wall Street over the past two decades. Having crushed the market over this period, the tech giant boasts a monster market cap of $1.05 trillion, making it one of the few elite companies to have crossed the trillion-dollar mark.
However, the bears may argue that Amazon's past success and current size severely limit whatever upside potential is left for the stock, making it a bad investment today. Is that the case? Let's look into Amazon's business and find out.
A barrage of headwinds for Amazon
Last year, Amazon was up against a plethora of issues that massively impacted its financial results. At the top of that list were economic problems -- inflation and supply chain disruptions -- that increased costs and decreased spending among consumers. So naturally, Amazon's e-commerce operations saw a steep decline in profitability as people were buying fewer goods than they otherwise would have, and the costs of delivering these products increased.
Compounding the problem, Amazon faced difficult year-over-year comparisons like many other corporations that performed exceptionally well in the early days of the pandemic. Unflattering comparisons to the previous years gave a negative impression of the direction of Amazon's business. And to make matters worse, the one area where the company usually impresses investors -- Amazon Web Services (AWS) -- hasn't been as impressive.
AWS is the company's cloud computing arm. It typically grows much faster than the rest of its business while recording much juicier margins. That continues to be the case, but there seems to be reasons to worry. In the fourth quarter, AWS's net sales increased by 20% year over year to $21.4 billion. But the segment's operating income declined by about 2% year over year to $5.2 billion, a rare occurrence.
Amazon's total net sales increased by 9% year over year to $149.2 billion during the quarter, while its operating income declined to $2.7 billion, down from the $3.5 billion reported in the year-ago period. Amazon's net income came in at $300 million, much lower than the net earnings of $14.3 billion recorded in the prior-year quarter. The tech company's issues are real, but there could be a light at the end of the tunnel.
Don't focus on the short term
To decide whether it's too late to buy Amazon stock, it's essential to determine whether the company's current issues are permanent and if it has opportunities to continue growing revenue, earnings, and cash flow in the long run. Turning to the first question, Amazon is mostly a victim of marketwide troubles impacting practically every corporation, problems that will reverse once the economy inevitably bounces back.
Once that happens, customers and businesses will increase spending, leading to higher revenue for the company's e-commerce and AWS segments. In the meantime, Amazon has tried to discipline its spending where it can, most notably by cutting jobs. Earlier this year, management announced the company would lay off some 18,000 workers.
Recession fears won't help improve things, so Amazon's business could keep struggling in the next year. But the company still has massive opportunities ahead. Consider Amazon's familiar e-commerce business. The tech giant has arguably played a role in helping drive the switch to online retail over the past decade or so. The numbers suggest this much. Amazon had a 37.8% share of the U.S. e-commerce market as of June.
The runner-up wasn't even in double digits. It's hard to build such a lead in any competitive industry without doing plenty of things right. Amazon's strategy has been to become obsessed with the customer experience. It is precisely to simplify the lives of its customers that it offers free one-day shipping on thousands of items for Prime members, among other perks.
Also, Amazon has an immense library of products and generally offers lower prices than the competition. As such, its name has become a reference in e-commerce, which helps attract and retain customers. That is a powerful competitive advantage. But e-commerce still represents a massive long-term opportunity. In the U.S., it still made up just 14.1% of total retail sales in the third quarter of 2022.
Amazon's name recognition and the features it offers practically guarantee that it can remain a leader in the sector. AWS will also rebound. Here too, the cloud-computing market is a long-term opportunity since cloud solutions help businesses improve efficiency and productivity. And here too, Amazon is the leader in the pack. The company will continue investing money in these (and other) opportunities to help boost both the top and bottom lines over the long run.
Buy and forget
Every company faces problems. But strong corporations can navigate challenging economic times and continue to grow long after. That's what will happen to Amazon. The tech company will get through the current environment and all its pitfalls.
Thanks to the many opportunities at its disposal and a solid competitive edge, it can still deliver market-beating returns for years. It's not too late to buy Amazon stock. Investors would do well to get in now as the company's shares are down 38% in the past year.
