Is Amazon Stock a Buy Now?

Amazon (AMZN 3.20%) posted its first-quarter results on April 27. The e-commerce and cloud leader's revenue rose 9% year over year (11% in constant currency terms) to $127.4 billion and exceeded analysts' estimates by $2.9 billion.

It posted a net profit of $3.2 billion, which marked a big improvement from its net loss of $3.8 billion a year earlier, as its earnings of $0.31 per share cleared the consensus forecast by $0.11. Its stake in the struggling electric vehicle maker Rivian continued to weigh down its bottom line with a pre-tax valuation loss of $467 million.

Amazon's growth rates seem stable, but its stock still dipped after the report and remains more than 40% below its all-time high. Should value-seeking investors buy Amazon's stock now as the bulls look the other way?

Image source: Amazon.

Amazon still faces near-term headwinds

Amazon's growth accelerated during the pandemic as more consumers shopped online and the soaring usage of cloud-based services lit a fire under its Amazon Web Services (AWS) cloud platform.

However, that growth spurt set both businesses up for tough year-over-year comparisons after the pandemic began to pass. That slowdown was exacerbated by inflation and other macro headwinds, which broadly curbed consumer spending and enterprise spending on cloud-based services.

Amazon's revenue rose 22% in 2021, but it cooled to just 9% growth in 2022. Its paper losses in Rivian also caused it to post a net loss of $2.7 billion in 2022.

Last year, Amazon generated 61% of its revenue from its North America business, 23% from its international business, and the remaining 23% from AWS. Here's how those three core businesses fared over the past year:

Data source: Amazon. YOY = year over year. 

Amazon's North America business is holding steady, and its international business seems to be stabilizing after lapping a challenging year. However, AWS' growth is still decelerating as cautious companies rein in their software spending. That ongoing slowdown is troubling for two reasons.

First, Amazon generates most of its operating profits from AWS' higher-margin business, and those profits subsidize the expansion of its lower-margin retail businesses. That's how Amazon offers free shipping, cheap hardware devices, and digital perks for its Prime members. Therefore, AWS' slowdown could erode Amazon's defenses against its retail competitors.

Second, AWS is still the largest cloud infrastructure platform in the world, but it faces stiff competition from Microsoft's Azure and Alphabet's Google Cloud Platform -- which grew their revenue 27% and 28% year over year, respectively, in their latest quarters. AWS' slower growth rate suggests it could struggle to stay ahead of those aggressive competitors.

During the conference call, CFO Brian Olsavsky said AWS' clients would continue to optimize their cloud spending in the second quarter, and that the segment's April growth rates were "about 500 basis points lower than what we saw in Q1."

Even though Amazon is bracing for more near-term headwinds for AWS, it still expects its total revenue to rise 5%-10% year over year in the second quarter. Analysts expect its revenue to rise 8% for the full year.

Focusing on cutting costs

As Amazon's growth cools off, it's shutting down some of its weaker businesses and shrinking its workforce to boost its margins. It already announced 18,000 layoffs in late 2022, and it plans to cut another 9,000 jobs this year.

Amazon's operating margin rose 50 basis points year over year and 190 basis points sequentially to 3.7% in the first quarter. It expects its operating margin to land between 1.5% and 4.1% for the second quarter, compared to analysts' estimates of 3.4% and 2.7% back in the second quarter of 2022.

As Amazon streamlines its operations, its investment-related losses from Rivian could moderate if the EV maker's stock finally bottoms out. Analysts expect that mix of rising operating margins and lower investment losses to bring Amazon back to profitability with a net profit of $14.7 billion, or $1.42 per share, for the full year.

Is Amazon's stock too cheap to ignore?

Amazon's stock still looks a bit pricey at nearly 60 times forward earnings, but that valuation has been temporarily distorted by its losses in Rivian. If we look at its revenue alone, it looks dirt cheap at less than 2 times this year's sales.

Amazon's decentralized challenger Shopify, which faces the same headwinds in the e-commerce market, still trades at 8 times this year's sales. Its smaller artisan rival Etsy trades at 5 times this year's sales.

In short, Amazon's stock could bounce back quickly once the macro environment improves. It's stuck in a cyclical rut, but it could be a great time to buy the stock if you believe it will remain the dominant force in e-commerce and cloud computing.