The current stock market correction has affected many companies, including Amazon (AMZN 1.19%). Amazon is down nearly 20% from its all-time high, and is actually near the cheapest the stock has ever been based on its price-to-earnings (P/E) ratio. The tech giant's valuation on that key metric hasn't been this low in two decades. This is a big deal, and investors should consider scooping up shares right now, as this could be a golden opportunity to cash in on a stock that's rarely discounted.
Amazon has two major business units pushing its profits higher
Amazon's e-commerce platform is the part of the company that most consumers interact with. However, there's a lot more to Amazon, and its other units offer far more compelling reasons to invest. In Q4, Amazon's online stores unit grew sales by 7% to $75.6 billion, so it's the largest part of the business by revenue, but also the slowest-growing one. Furthermore, e-commerce has notoriously low margins, so it's safe to assume that Amazon isn't generating a ton of profit from those sales.
NASDAQ: AMZN
Key Data Points
Two other units account for the lion's share of Amazon's profits: advertising and Amazon Web Services (AWS). The company groups advertising into its commerce division categories when it reports profits, so investors can't see the exact margins this unit is putting up. However, by looking at other companies focused on digital advertising versus those focusing on retail, it's safe to assume that this is an incredibly profitable business for Amazon. In Q4, its advertising revenue rose 18% year over year to $17.3 billion. While that's 23% of the revenue of Amazon's online stores, if we assume that the online stores segment had about the same operating profit margin as Walmart (4.3%) and that the digital advertising segment had a margin comparable to that of Alphabet (32%), then we'd conclude that online stores segment would have generated about $3.25 billion in operating profits while advertising generated about $5.54 billion.
True, those are assumptions based on the margins of similar businesses (because Amazon doesn't publicize the operating margins of all of its business units), but they illustrate how important digital advertising is to Amazon.
The company, does, however, break out its operating margins for AWS, and they are much higher than the margins of its commerce-focused segments.
In Q4, the cloud computing segment had an operating margin of 37%. This far exceeds Amazon's companywide operating margin of 11.3%. Moreover, for the full year, AWS provided 58% of Amazon's operating profits, so from a bottom-line perspective, it's the company's most important business unit.
Investors should keep in mind that even if the U.S. enters an economic downturn, the part of Amazon's business that is its biggest profit driver will not be as heavily affected as its more consumer-focused units. In that light, they may find it easier to justify buying the stock today.
Amazon has never been this cheap before
Amazon's stock now trades at 35.5 times trailing earnings; it has seldom been this cheap.
AMZN PE Ratio data by YCharts.
Indeed, the last time Amazon's valuation was this low was in the mid-2000s, when its business looked far different from what it looks like today. As a result, I think this share price slide presents a great buying opportunity, as in the longer term, AWS and digital advertising are likely to push Amazon's earnings -- and the stock price -- much higher.
Analyst Nat Schindler at Scotiabank gave similar reasons to support the $306 12-month price target he put on Amazon's stock in January. That would amount to a rise of more than 50% from the current price -- a massive potential gain.
While I don't know if Amazon's stock will grow that much this year, I think Schindler generally has the right idea here. As a result, I think right now would be an excellent time to buy Amazon stock.
