Amazon: Third-quarter earnings disappoint, but long-term growth remains intact

  • Amazon faces significant weaknesses in its core e-commerce sales
  • The company’s cloud and advertising businesses can be salvaged as growth in those areas remains strong.
  • Chased by economic headwinds, AMZN shares have fallen more than 30% this year, underperforming their large-cap tech peers.

It won’t be a big surprise if Amazon.com (BVMF:)(NASDAQ:) shows signs of losing its growth momentum when it releases its balance sheet tomorrow after the market closes.

The combination of a 40-year high and tight monetary conditions forced consumers and ad companies to cut back on spending, hurting AMZN’s margins.

Furthermore, since the end of the pandemic, the e-commerce giant has faced significant weakness in its core e-commerce sales as customers have stopped buying as many electronics or furniture to save money for meals, travel and shows.

Pressured by these challenges, Amazon’s North America division, home to its core online retailer in its largest market, posted its third straight operating loss in July.

In fact, US retailers are cutting prices to clear a backlog of goods that are no longer in demand. Amazon’s decision to hold a second Prime Day shopping event this year signals that the online retailer is facing similar problems.

Along with slowing e-commerce sales, Amazon’s investors are also worried about escalating costs after a massive pandemic-era expansion that has left the company struggling to justify its vast warehouse space and inflated wages. Handling costs rose 14% to $20.3 billion, about the same as in the prior quarter.

Hurt by these headwinds, AMZN’s stock has fallen more than 30% this year, underperforming its major tech giants, including Apple Inc (BVMF: )(NASDAQ: ) and Microsoft (NASDAQ: ) Corporation (BVMF: ) (NASDAQ: { {252|MSFT} }).

silver lining

While those pressures will continue to hurt the company this year and likely next year, there’s no reason for investors to give up on AMZN stock. A lean period is often the best time for innovative companies like Amazon to further strengthen their market share.

Amazon’s e-commerce US Share sales grew 40% in 2021, making it the fastest-growing major US retailer in the segment. I don’t see this expansion slowing down, especially when e-commerce sales in the US are only 13.2% of total retail sales, with plenty of room for e-commerce to grow.

Investors should also keep in mind that Amazon’s business is not just e-commerce. The company’s cloud computing and advertising units are still showing impressive expansion.

Amazon Web Services revenue rose 33% in the second quarter, while its advertising business, for which the company recently began reporting financials, grew 18% over the same period. The company now owns 34% of the nearly $55 billion market for cloud infrastructure services, according to Synergy Research Group.

Considering its healthy balance sheet, high free cash flow and highly diversified business model, it’s not hard to see that Amazon remains in a solid position to weather the current hostile economic environment.

In a note to clients today, JPMorgan reiterated its overweight rating on Amazon, saying the giant is “well positioned for long-term growth” heading into earnings on Thursday.

“We have recently cut estimates due to increased currency headwinds and a slowdown in discretionary spending. However, we remain confident that AMZN can re-accelerate revenue growth and expand OI margins in 2023, driven in large part by improving retail sales and still solid AWS growth.”

Amazon’s leadership in many of the areas it operates in is the main reason most Wall Street analysts rate its stock a buy. In an Investing.com survey of 54 analysts, 49 rated the stock a long, with a 12-month consensus price target indicating upside of 44%.

AMZN Consensus Estimates

AMZN Consensus Estimates

Source: investing.com

Of course, owning Amazon still comes at a price, even though the stock has fallen in price this year. AMZN is currently trading at 50 times forward earnings for the next 12 months. On the other hand, the average multiple is about half that.

Still, betting on the company has been extremely profitable for long-term investors, with its shares up around 900% over the past decade.

The last line

Amazon shares could show further weakness after tomorrow’s latest earnings report. That decline shouldn’t be a reason for pessimism about the company’s future, given its dominance in e-commerce and the explosive growth of its cloud and advertising businesses.

Warning: At the time of writing, the author held long positions in AMZN, AAPL, and MSFT. The opinions expressed in this article are solely those of the author and should not be construed as investment advice.

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