There's no denying it: 2023 has been a great year to own shares of Amazon (AMZN 0.87%). The stock is up 52% year to date, meaning a $10,000 investment on Jan. 01, 2023 would now be worth $15,000.
But what about the future? Is now the time to load up on more Amazon shares or not? Let's dig into the arguments for both sides and see.
Image source: Getty Images.
Reasons to buy Amazon shares
First, let's look at the bullish case for Amazon.
NASDAQ: AMZN
Key Data Points
To begin, the company's fundamentals are rock solid. As of its most recent quarter (the three months ending on Jun. 30), the company posted revenue growth of 11%, which is quite remarkable given Amazon's massive revenue total. In the last 12 months, Amazon generated $538 billion in revenue. Among American companies, that's second only to Walmart, with its $631 billion in revenue.
To put Amazon's staggering revenue total in perspective, it's more than the 12-month revenue totals of Tesla ($94 billion), Disney ($88 billion), Meta Platforms ($121 billion), FedEx ($89 billion), and Bank of America ($100 billion) combined.
Granted, most of that revenue isn't converted to profit. In fact, Amazon's lack of profitability has been a cause for concern over the last year. However, the company appears to have turned a corner with its recent cost-cutting initiative.
Amazon's operating margin soared to almost 6% in its most recent quarter, highlighting that management has come to grips with the fact it hired too many workers during the pandemic boom.
As for valuation, shares still trade at a discount to their long-term average. Amazon's price-to-sales (P/S) ratio is 2.45, far below its five-year average of 3.43.
AMZN PS Ratio data by YCharts
Reasons to sell Amazon shares
On the flip side, there are some reasons for concern. First, the global economy remains on a knife's edge. Central banks like the Federal Reserve have raised short-term interest rates at a record pace over the last two years to control inflation. As a result, borrowing costs have soared. Thirty-year mortgage rates are now approaching 8%. Meanwhile, inflation remains above the Fed's target rate of 2%. At any rate, none of this bodes well for the financial health of the average consumer, who will eventually have to scale back spending. That's not good news for Amazon, whose business relies on consumer spending for the bulk of its revenue.
Second, Amazon also faces legal challenges. In September, the Federal Trade Commission, along with multiple state attorneys general, sued Amazon for alleged monopolistic practices. The lawsuit adds a layer of uncertainty. A trial may take years to unfold, or Amazon might settle out of court. Nevertheless, the case could serve as a costly distraction for the company and its management.
Lastly, a slowdown in the cloud market would prove troublesome for the company. Amazon Web Services (AWS) now generates more than 16% of the company's revenue but accounts for an outsize 70% of its profit.
Image source: The Motley Fool.
If organizations begin to pull back on cloud spending, Amazon shares could struggle.
Is Amazon a buy now?
While storm clouds are on the horizon, most seem like short-term concerns for Amazon:
- Recessions are famously hard to predict but tend to last less than a year.
- Consumer spending has slowed, but it is still increasing overall.
- Other recent antitrust lawsuits have struggled to affect major American corporations.
Meanwhile, Amazon's business fundamentals remain sound. In the long run, investors should still consider the stock for its diverse business segments, growth, and superb leadership team.
