There's no denying Amazon (AMZN 0.55%) is on the defensive right now. Ditto for the stock. Spurred by the Federal Trade Commission's recently announced antitrust lawsuit levied against the e-commerce giant, Amazon shares are down 13% just since the middle of last month. This pullback undermines a budding effort to recover last year's steep losses. Thanks to this fresh setback, Amazon stock is now 33% below its late-2021 peak and is seemingly testing the waters of even-lower lows.
If you're a long-term investor who can take a step back and look at the bigger picture, though, this dip is a buying opportunity. Three specific factors solidify the bullish argument for Amazon stock.
Amazon is still a juggernaut in any form
Yes, the FTC's lawsuit is a legitimate concern. Whether Amazon is monopolistic in the legal sense of the word, it's certainly big enough to look like one. That may be enough to sway opinion against the company inside a courtroom.
On the other hand, Amazon's public response to the FTC's suit also holds water. Amazon.com is a platform that has allowed lots of third-party sellers to use the web as a sales tool, gaining access to customers they would never have found on their own. And, contrary to the FTC's suggestion, sellers aren't required to use a specific shipping or fulfillment service to sell on Amazon.com.
There's also the not-so-small detail that both consumers and sellers still have quick and easy access to alternative marketplaces; being better just because you're bigger (and vice versa) isn't a crime.
Just for the sake of argument, however, let's say the FTC's suit gets legal traction. Then what? The worst-case and least likely scenario is a breakup of the company's different operations. More plausibly, the remedy will be a change in how the selling platform features certain items and handles seller services. Amazon's separate pieces will still exist, and they'll still be powerhouses. Indeed, they're about to be powerhouses in their respective lines of business anyway, regardless of the judicial system's eventual view of the company as we know it today.
To this end, changes to -- and growth of -- Amazon's three most important components are the three pillars of the bullish thesis here.
1. Advertising is an increasingly important profit center
While Amazon's roots may be selling goods to consumers, that's not the most important business model any longer. Rather, its core profit center is increasingly the monetization of the website's traffic via advertising.
For perspective, the company sold $59 billion worth of physical goods during the second quarter of this year, barely breaking even in doing so. However, Amazon generated an additional $10.7 billion worth of advertising revenue (up 22% year over year). In that this ad revenue is digitally driven using a platform and web traffic that already exists, it's reasonable to presume this is a high-margin business as well.
Without outright saying it, this model is the crux of the Federal Trade Commission's legal beef with Amazon; smaller sellers are seemingly being disadvantaged by larger sellers with bigger ad budgets. The model clearly works, though, and now that Amazon is figuring it out, don't expect any legal remedy to prevent Amazon from finding a way around it to accomplish what it's currently accomplishing.
Meanwhile, the FTC's case against Amazon is undermined by the fact that rival retailers like Kroger and Walmart -- dominating names in their own right -- are now utilizing a similar business model. Walmart is even monetizing its website's traffic by allowing third-party sellers to advertise specific products at Walmart.com.
So, it's not just Amazon. This model is quickly becoming the new norm within the e-commerce market.
2. Cloud computing is a key breadwinner no matter what
Whether or not the FTC's case is a threat, know that it's only a threat to Amazon's e-commerce business, which isn't the company's breadwinner. Far more profitable is Amazon Web Services, or AWS, which should remain unimpacted and unimpeded by the antitrust suit. For perspective, although AWS's second-quarter revenue of $22.1 billion only accounted for 16% of Amazon's total Q2 top line, it also contributed a fairly typical 70% of companywide operating income.
And its cloud computing business is also growing a heck of a lot faster than its e-commerce arm is. Although inflation has been crimping Amazon Web Services' profitability a bit of late, Q2's revenue was up a healthy 12%. Don't be surprised to see its profitability improve going forward, too, as costs abate.
Image source: Getty Images.
Most important, though, is the likely longevity of Amazon Web Services' sales and earnings growth. Emergen Research expects the global cloud computing market to grow by nearly 15% per year through 2023, jibing with outlooks from GlobalData and Straits Research.
In this vein, know that some investors have called for Amazon to spin off its highly valuable cloud computing operation as a means of unlocking value. Although a complete breakup is the least likely outcome of the Federal Trade Commission's lawsuit, were it to happen, it wouldn't necessarily be the end of the world.
3. In-house logistics saves money, creates options
Last but not least, Amazon stock is worth buying despite the FTC's antitrust accusation because it's finally capitalizing on an opportunity not just to save money but -- maybe -- to monetize assets it already controls.
In its infancy, the company was wholly dependent on third-party logistics service providers like UPS and the U.S. Postal Service. It didn't take too long, however, for their cost and pricing power to chip away at Amazon's own profits. That's why Amazon launched a homegrown delivery service in 2018. It now manages a fleet of thousands of its own vans and tractor-trailers and several dozen cargo jets. Prior to the pandemic, it was even tinkering with offering shipping services for goods not purchased at Amazon.com, although that idea was mothballed during the pandemic so the company could focus on meeting the swell of demand for online shopping at the time.
Now it's back. Without any fanfare or major announcement, in August of this year, Amazon began offering these ground-shipping services again.
It's still not entirely clear what the intent is. Certainly, Amazon saves money by handling its own deliveries (provided this operation has enough scale, which it seems to). And, if a truck or plane is going to be on the road or in the air anyway, it makes sense to monetize and/or offset some of the cost of the trip with a few more packages.
A true, stand-alone competitor to UPS or FedEx, though? Only time will tell.
The thing is, it doesn't really matter what Amazon's in-house logistics plans are. We know Amazon saves money and sells more goods by managing its own super-speedy shipping service. The option to expand that operation at any point in the future takes profit-production pressure off of the e-commerce operation that's increasingly under attack.
Brace for continued volatility (that's worth it)
Don't dismiss the potential impact of the Federal Trade Commission's claim. If nothing else, it creates bad optics, which can take a temporary toll on a stock.
Conversely, keep things in perspective. Amazon has been under regulatory and legal scrutiny before and survived. Besides, most of Amazon's ongoing evolutions and profit-growth drivers aren't in any real legal jeopardy. The only one that's a real potential problem is the advertising model Amazon.com now utilizes. Even that claim, however, feels a little bit wobbly.
Bottom line? Amazon's got far more working for it than against it. The recent headlines are more bark than bite, even if that bark could continue to rattle the stock for a time.
