Now that Amazon (NASDAQ: AMZN) stock has split, investors can move past the drama and get back to focusing on the fundamentals. Whereas over the past few years the company has posted excellent performance and looked like a no-brainer buy, today growth is slowing down and even profitability is suffering.
Is Amazon still the easy pick for a path to stock price appreciation? Or should investors hold off while the company deals with headwinds? Let’s examine Amazon stock from both angles.
Bull case: The future looks bright for the e-commerce king
Jennifer Saibil: Decelerating sales growth never feels good. But if you can look beyond the current pressures, Amazon still has a long growth runway and the potential to bring rewards for confident investors. If there are lessons to be learned from the volatile investing climate we’re experiencing, one of the most important is that companies with strong fundamentals can carry investors through challenging times. That’s how Warren Buffett has been so successful, and it’s no wonder that his holding company, Berkshire Hathaway, owns Amazon stock.
Most of retail has been struggling of late, thanks to a handful of macroeconomic concerns. This isn’t new terrain, and the top companies can weather the storm while pivoting to match demand. There are several reasons to be confident about Amazon’s future.
One is Amazon Web Services (AWS). The company’s cloud computing segment consistently earns high sales increases and often supports the entire company’s profits. In the 2022 first quarter, for example, AWS sales increased 37% year over year, and even though they accounted for about a quarter of total sales, they accounted for all of the company’s operating income.
That’s great, but it’s not enough. And it doesn’t need to be, because the rest of the company is likely to be OK. It invested copious efforts into building out infrastructure to meet unparalleled demand last year, and it’s pressured as it winds some of that down. CEO Andy Jassy said, “We know how to do this and have done it before.”
In the meantime, it’s developing itself through a stronger physical presence in grocery, bigger and better streaming services, and many other ventures. Sales are slowing down, but the company is not.
Bear case: Amazon’s sales are slowing, and profits are falling
Parkev Tatevosian: Admittedly, Amazon is an excellent business with minor faults to find. My argument against buying Amazon centers on short-term difficulties. The business thrived at the onset of the onset of the pandemic, notching north of a $100 billion revenue increase in 2020. To meet that surge in customer demand, Amazon invested in building extra capacity. Economic reopening has slowed growth in online shopping in favor of a return to brick-and-mortar retailers.
Indeed, Amazon’s revenue increased by 7.3% year over year in its most recent quarter. That was its slowest quarterly increase rate in several years and continued the deceleration from the boom periods of over 40% growth in several quarters during the most acute phases of the pandemic.
But Amazon cannot quickly or effectively decrease capacity to adjust to slowing demand. Fulfillment centers, delivery vans, trucks, planes, and added staffing are relatively fixed in the short term. The aforementioned rise is expected to cause Amazon’s operating income to fall by more than $6 billion in the second quarter of 2022. Management noted that fixing the over-investment is a priority, but it will take some time to complete given the degree of difficulty.
Meanwhile, even though Amazon’s stock is trading at near its lowest price-to-earnings ratio in the past five years, at 60, the stock is expensive when measured absolutely. Slowing sales, falling profits, and expensive valuations are typically not good for shareholder returns.
Should you buy Amazon stock?
The short-term outlook doesn’t look amazing right now, but investors were still dazzled by the company’s stock split. So much so that the stock zoomed up almost 10% last week.
That’s because the long-term outlook is still very healthy. Investing right now means expecting early pressure. But it’s a vote of confidence in what the stock can do over many years, and with a stock price that’s down 25% this year, the opportunity is inviting for investors who can think to the future.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.