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E-commerce colossus Amazon (AMZN 2.99%) saw its stock price decline in recent months, dropping from over $100 per share to a 52-week low of $81.43 on Jan. 6. But rather than flee from the retailing giant, investors with an eye toward the long term can take the opportunity to scoop up these beaten-down shares.
Wary investors burned by the stock market’s tech wreck of 2022 may feel skeptical of Amazon. After all, the company struggled with profitability last year. Through the first three quarters of 2022, Amazon reported a net loss of $3 billion compared to net income of $19 billion in 2021.
Yet, a closer look at the factors affecting Amazon’s business last year reveals the retailer’s path to recovery. This, combined with the many revenue-generating weapons in Amazon’s arsenal, including a burgeoning advertising business, explains why Amazon stock is poised to bounce back.
Macroeconomic conditions, such as inflation and a strong U.S. dollar, hurt Amazon in 2022, particularly its international revenue. These conditions contributed to Amazon’s profitability problems last year but weren’t the only factors.
The company also struggled with the consequences of investment decisions made back in 2020. The coronavirus pandemic drove consumers to spend more time online, creating a surge in digital sales that boosted Amazon’s 2020 revenue to a 38% year-over-year increase, nearly double 2019’s 20% growth.
To meet this demand, Amazon invested in warehouse expansion, increased fulfillment capabilities, and other expenditures. Then in 2022, the pandemic-induced revenue boost faded as consumers returned to pre-pandemic behaviors, leaving Amazon with, as CFO Brian Olsavsky put it, “excess capacity in our fulfillment and transportation network.”
Amazon responded by slashing costs and selling its additional capacity to its marketplace of third-party sellers. Fees from these types of third-party seller services accounted for $28.7 billion of the company’s $127.1 billion in third-quarter revenue.
Even so, as Olsavsky explained, “capacity decisions are made years in advance,” so it’ll take time for Amazon’s e-commerce business to fully adjust to 2022’s economic about-face. But the retailer is making progress. In Q3, the company achieved over $1 billion in cost savings.
Even amid retooling its e-commerce operations, Amazon’s Q3 online store revenue reached $53.5 billion, exceeding 2021’s $49.9 billion. The company also benefits from industry growth. Forecasts estimate global e-commerce sales to increase from $5.2 trillion in 2021 to $8.1 trillion by 2026.
The company’s e-commerce division is only one weapon in Amazon’s arsenal. Its advertising business is another, having quickly ballooned from $12.6 billion in 2019 to $31.2 billion in 2021.
Amazon’s 2022 ad revenue is expected to blow past 2021’s figure. Through three quarters, ad sales stood at $26.2 billion.
In Q3, Amazon’s advertising business generated $9.5 billion, a 25% year-over-year increase. This jaw-dropping growth occurred in the face of the advertising industry’s 2022 slowdown amid unfavorable macroeconomic conditions.
Compare Amazon’s performance to digital advertising juggernaut Alphabet-owned Google, which saw Q3 year-over-year ad revenue grow only 2.5%. In fact, Amazon’s ad business is now larger than YouTube’s. In 2022, Amazon’s advertising haul through three quarters was $26.2 billion, compared to YouTube’s $21.3 billion.
Today, Amazon dominates the digital retail advertising sector. Estimates place Amazon’s ad business at more than 10 times the size of its next closest rival, Walmart.
Amazon is in a strong position to continue growing its advertising division. The company holds vast, proprietary data on customers, allowing Amazon’s advertising platform to target ads with precision, a capability highly valued by marketers.
Moreover, marketers selling retail goods can tie the results of their ad spending more directly to sales on Amazon than on Google, given Amazon’s e-commerce popularity. Thanks to these strengths, forecasts predict Amazon’s advertising segment will reach $64.3 billion by 2026.
Yet another contributor to Amazon’s success is the company’s leadership in the red-hot cloud computing sector. Its Amazon Web Services (AWS) division has a greater cloud computing market share than Microsoft and Google, its next two rivals, combined.
This part of Amazon’s business continues to expand. In Q3, AWS revenue increased to $20.5 billion from 2021’s $16.1 billion. The global cloud computing industry is forecast to grow from $405.7 billion last year to $1.7 trillion in 2029, serving as a tailwind for AWS.
With industry growth expected in cloud computing, advertising, and e-commerce, Amazon is in a strong position to bounce back from last year’s struggles, especially after Amazon realigns its expenditures.
With so many revenue-generating weapons, Amazon won’t stay a beaten-down stock for long. Shares are already showing signs of a revival, so now is a good time to buy.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Robert Izquierdo has positions in Alphabet, Amazon.com, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Microsoft, and Walmart. The Motley Fool has a disclosure policy.
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