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Motley Fool Issues Rare “All In” Buy Alert
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Amazon (AMZN -0.77%) shares reached an all-time high of $186.57 on July 8, 2021, amid the COVID-19 pandemic when home-bound consumers flocked to the e-commerce giant for necessities.The company’s stock has since fallen 50%, suffering from a stock market sell-off in 2022. Amazon has been hit particularly hard as rises in inflation have led to reduced consumer spending.
With a majority market share in e-commerce and cloud computing, an investment in Amazon seems like a no-brainer. However, as the likelihood of a recession in 2023 rises and Amazon’s cloud computing business experiences slowing growth, other companies’ stocks look more attractive.
Here’s why it’s a good idea to hold off on investing in Amazon, despite its significant decline in share price.
On Oct. 27, Amazon released its earnings report for the third quarter of 2022. Revenue rose 14.7% year over year to $127.1 billion, missing analysts’ expectations by $370 million. Operating income saw a year-over-year decline of 48% from $4.8 billion in Q3 2021 to $2.5 billion in Q3 2022. Most of the company’s declines came from its e-commerce business, with revenue dropping by 5% to $27.7 billion in its International segment.
While revenue in its North American segment rose 20% to $78.8 billion, its operating income reported a loss of $412 million. The hits led Amazon’s stock to plummet 20% within 24 hours as investors lost confidence in its future prospects.
Consumer-reliant stocks across multiple industries have suffered a downturn in revenue throughout the year. However, Amazon seems to be far worse off than its peers. In terms of free cash flow, Amazon reported a negative $4.97 billion as of Sept. 30. By contrast, Microsoft (MSFT -0.04%) produced $63.3 billion, Walt Disney came in at $1.37 billion, and even Netflix was in the positive with $471.9 million. Amazon is clearly hemorrhaging money as it makes up for its losses in 2022.
Its e-commerce business made up 83.8% of its revenue in Q3 2022. Considering Amazon may be staring down the barrel of a recession and further declines in 2023, the company might be playing catch-up for the foreseeable future.
Amazon’s likely temporary reduction in its e-commerce business wouldn’t be as big of a problem if its cloud computing service, Amazon Web Services (AWS), wasn’t experiencing slowing growth. In Q3, the cloud computing segment enjoyed year-over-year growth of 27% to $20.5 billion and provided the company’s only positive operating income at $5.4 billion. While the growth was a bright spot in the quarter, it was also troubling when compared to the segment’s 33% growth in Q2 2022 and 39% a year ago in Q3 2021.
AWS was responsible for a majority 34% market share in the $217 billion cloud computing industry as of Q3 2022, with Microsoft’s Azure second, with 21%. Cloud computing is a lucrative market, expected to see a compound annual growth rate of 15.7% until at least 2030, according to Grand View Research.
AWS’ dominant market share is positive for now. However, considering Microsoft’s free cash flow is significantly larger, the Windows company is better positioned to invest heavily in Azure and steal the cloud computing crown away from Amazon in the coming years. In fact, Microsoft CEO Satya Nadella revealed on Nov. 16 that the company is building more data centers in Asia, calling it a “massive growth market.”
Amazon is unlikely to be down forever. The company is a household name and the first place most people turn to for online shopping. However, with further declines potentially on the horizon for its business and a price-to-earnings ratio of 85, Amazon’s stock remains too expensive for an investment right now, even amid a stock market sell-off.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Microsoft, Netflix, and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.
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