Down 46%, Is Amazon Stock a Bear Market Buy?

The Nasdaq Index has fallen 34% year to date, with big tech companies like Amazon (AMZN 1.88%) (down 46% this year) leading the plunge. The company is reeling after third-quarter earnings revealed weakness in its e-commerce segment and guidance. But the discounted stock price could give investors the chance to bet on a rebound. 

Third-quarter earnings were a dud

Online shopping activity is struggling to keep up with the pandemic-era frenzy. And as America’s top e-commerce destination (with a market share of 38%), Amazon is working hard to navigate this headwind. While total sales increased by 15% year over year to $127.1 billion, operating income fell from $4.9 billion to $2.5 billion, a decline of roughly 49%. 

As in the second quarter, the bottom-line weakness stems from Amazon’s U.S. and international e-commerce segments, which over-expanded during the pandemic and now face lower efficiency. Challenges like inflation could also pressure margins. That said, investors shouldn’t expect these to be permanent problems for the company. 

According to CEO Andy Jassy, Amazon is making steady progress in lowering costs in its fulfillment network. And the company’s economies of scale (which generally lead to better prices) could allow it to remain a retailer of choice for e-commerce shoppers in this high-inflation economy.

Focus on new growth drivers 

Amazon’s fourth-quarter guidance spooked investors. Management expects sales growth of 2% to 8% (between $140 billion and $148 billion) and operating income of between $0 and $4 billion — a wide range that highlights the unpredictability of the macroeconomic environment.

The forecast suggests Amazon will continue facing challenges in its e-commerce business over the medium term. But the company’s long-term thesis is about more than just e-commerce. 

Cloud computing remains the key growth driver. Amazon Web Services (AWS) sales jumped by 27% to $20.53 billion, and the segment’s operating income increased by 11% to $5.4 billion. 

Image source: Getty Images.

Management believes the cloud computing market is in the early stages of adoption, and they are positioning Amazon’s offering to maintain or even grow its current 34% market share.

In Q3, the company announced the general availability of FleetWise, a solution for automakers and logistics companies that makes it easier to collect and transfer vehicle data to the cloud in real time. Efforts like this can help AWS tap into new and potentially lucrative opportunities. 

Investors should also keep an eye on digital advertising. In Q2, Amazon’s advertising services revenue jumped 25% to $9.5 billion. And the company’s large userbase of more than 300 million shopping-motivated consumers gives it an economic moat in this opportunity.

A quality company — now even cheaper

Amazon’s recent stock price declines could make it more attractive to value-hungry investors. While its price-to-earnings (P/E) ratio of 40.5 looks high on the surface, the market might be overlooking the potential for the company’s higher-margin AWS business to drive most of its future growth and profits.  

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.

Leave a Reply

Your email address will not be published. Required fields are marked *