One can understand the sentiment that investors have missed out on Amazon (AMZN 2.29%). After a massive sell-off in 2022, the stock has risen by over 60% this year. Moreover, investors reacted positively to the recent earnings release for the third quarter of 2023, which further added to the buying.
And yet, Amazon stock still sells at a 30% discount from its 2021 high. Should investors take that as a sign that they should buy? Let's take a closer look.
Deciphering Amazon's financials isn't easy
In many respects, Amazon is an enigma, and the Q3 2023 earnings report confirms that.
For instance, third-quarter net sales came in at $143 billion, a 13% annual increase. However, a deeper dive suggests bright spots as well as disappointments. Amazon Web Services (AWS) has long driven the majority of Amazon's operating income. It reported a 12% yearly rise in net sales to $23 billion, which was well below the 27% yearly increase reported in Q3 2022.
Then there are the online stores, which make up the largest portion of Amazon's net sales at $57 billion. They managed only a 6% rise in net sales year over year. Combined, the two retail segments in this grouping managed only $4.2 billion in operating income, well below the $7 billion for AWS. And since those figures include subscriptions, advertising, and third-party seller services, it is unclear whether its (low margin) online sales segment turns a profit.
While there was a lack of clarity, net income for the quarter was $9.9 billion, a considerable increase from the $2.9 billion earned in the year-ago quarter.
Effects on Amazon stock
Given that net income growth, the considerable increase in Amazon's stock price for this year could make sense. It has certainly affected the P/E ratio, which now stands at approximately 70. Still, high multiples are not new for Amazon.
Also, as mentioned before, Amazon's cloud segment provides most of its overall operating profit. Longer-term estimates for the cloud indicate its growth will recover. Fortune Business Insights forecasts a compound annual growth rate of 20% for the cloud industry through 2030. Amazon leads the competition in terms of cloud market share.
Although Amazon does not break down the faster-growing parts of its retail segments in great detail, investors should not ignore them. Third-party seller services brought in $34 billion in net sales for the quarter, rising 20% yearly. Also, advertising, which brought in $12 billion in net sales, surged 26% year over year. Even if online stores end up being a loss leader for the company, that business provides the platform needed to support fast-growing parts of its consumer businesses.
Is it too late to buy Amazon stock?
Given the potential for Amazon outside of its online stores, new investors can still profit from buying Amazon. Indeed, low operating income for the retail segments and slowing growth in the cloud may cause concerns.
However, projections for the industry indicate the slowdown in AWS is probably temporary. Moreover, the slower-growth online stores provide a valuable support role for other parts of the business, such as advertising and third-party seller services. Thus, investors should feel comfortable buying into the recovery in the stock price, even at current levels.
