The last year has been challenging for Amazon (AMZN -0.27%). Facing macroeconomic pressures and some industry-specific headwinds, the company's stock has lost roughly 42% of its value over the last year, and shares are trading down 49% from their high.
But while the company's near-term business outlook is being shaped by some very real challenges, it would be a mistake to think that the e-commerce and cloud-services giant's best days are now in the rearview mirror. Read on to see why I think Amazon stands out as one of the best stocks to buy in 2023.
Image source: Getty Images.
Why is Amazon under pressure?
Before getting into the meat of why Amazon stands out as a fantastic long-term investment at today's prices, it's worth analyzing why the company and its stock have been struggling lately.
In addition to rising interest rates generally making the market more averse to growth stocks, high fuel costs and other inflationary pressures are leading to elevated operating expenses for Amazon's online retail business. These pressures are arriving at a particularly inopportune time.
In the face of soaring demand driven by pandemic-related conditions, Amazon made some huge investments in continuing to build out its warehousing and distribution imprint. The timing of these big investments proved to be less than ideal.
As pandemic-driven demand eased and people got back to shopping at brick-and-mortar locations, Amazon saw engagement for its e-commerce platform moderate. So in addition to facing tough bases of comparison to periods when the pandemic was pushing shopping to online channels, Amazon has been dealing with added costs related to its big infrastructure investments and the added challenge of inflationary pressures driving up expenses.
Making matters worse, the combination of economic slowdown and rising fuel costs has led to decelerating sales growth and margin contraction for the company's highly important Amazon Web Services (AWS) segment.
To sum it up, the company is facing a litany of headwinds right now. But there's little reason to think its long-term growth story has been derailed.
Amazon is built to last, even if times are tough
Amazon's near-term growth outlook is admittedly less than impressive, with management's midpoint guidance calling for sales of $144 billion and growth of just 4.8% in the fourth quarter. But here's where I think that it's important that investors keep Amazon's penchant for innovation and operational excellence in mind.
Even though AWS' operating income margin dropped to 26.3% in the third quarter, down from 30.3% in the prior-year period and 29% in Q2 2021, the segment is still posting strong margins and remains primed for long-term growth. AWS provides the backbone for much of the modern internet, and the segment should continue to see strong sales growth through the next decade and beyond even though there will undoubtedly be periods of economic downturn across the stretch.
Solid performance for AWS will help Amazon weather tough times and eventually get back to thriving amid a more favorable operating backdrop.
Don't overlook incredible potential in e-commerce
In terms of value waiting to be unlocked, I think investors should hone in on the fact that Amazon is an early leader in robotics. Right now, the market is focused on headwinds that are hurting performance for the e-commerce business and dragging down profitability for the company overall. But it seems the market has lost sight of the incredible scale and resource advantages that Amazon will be able to leverage in online retail.
Amazon remains in the early stages of benefiting from warehouse automation and the rise of autonomous delivery machines. E-commerce has always been a relatively low-margin business, and Amazon has historically been content to operate its online-retail business at a loss or slight profit in favor of expanding its sales base and building a massive operational imprint.
Advancements for robotics and self-driving vehicle technologies actually stand to make the company's e-commerce business significantly more profitable over time. As this happens, the payoffs and benefits of the company's incredible investments to build out the e-commerce business will start showing up meaningfully as earnings on the company's quarterly reports.
While 2022 was marked by a growth slowdown, the e-commerce market still looks poised for growth over the long term, and Amazon will continue to play a leading role pushing the industry forward. Research from Morgan Stanley estimates that the overall U.S. e-commerce market could grow from $3.3 trillion last year to $5.4 trillion in 2026, and there's plenty of room for continued growth from there.
Amazon's recent move to expand its Buy with Prime program is a reminder of just how powerful the company is in online retail, and the initiative will allow it to capture a cut of sales from any e-commerce operation partnered through the platform. E-commerce will continue to account for a greater portion of overall retail sales in geographic territories throughout the world, and the economy-of-scale advantages that Amazon has built will eventually start to become much more apparent from a profit-generating perspective.
This might be a once-in-a-decade buying opportunity
Amazon remains one of the best companies in the world, and investors have an opportunity to capitalize on elevated bearish sentiment surrounding the stock. With the company valued at roughly 1.7 times expected forward sales, Amazon trades at levels that set the stage for attractive long-term upside, and investors who take a buy-and-hold approach with the stock stand a very good chance of seeing strong returns.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon.com. The Motley Fool has a disclosure policy.
Certainly! It's clear that the article delves into several key concepts regarding Amazon's recent challenges and future prospects. Let's break down the essential ideas discussed:
1. Amazon's Recent Challenges
- Stock Performance: Amazon's stock has declined by around 42% over the last year due to macroeconomic pressures, industry-specific headwinds, and a shift in consumer behavior post-pandemic.
- Operating Expenses: Factors like rising interest rates, high fuel costs, and inflationary pressures have led to increased operating expenses, particularly impacting the online retail business.
- Investments and Moderated Demand: Amazon made substantial investments in infrastructure during heightened pandemic-driven demand, but as demand normalized and physical shopping resumed, the online engagement moderated, creating tough comparisons for the company.
2. Challenges in Amazon Web Services (AWS)
- Economic Factors: Economic slowdown coupled with rising fuel costs has caused a slowdown in sales growth and margin contraction for AWS, a highly important segment for Amazon.
3. Long-Term Growth Story of Amazon
- Innovation and Operational Excellence: Despite near-term challenges, Amazon's history of innovation and operational excellence, especially in AWS, positions it for sustained long-term growth.
- AWS Potential: Despite margin contraction, AWS remains crucial for the internet's infrastructure, promising strong sales growth in the coming years, even amid economic downturns.
4. E-commerce Potential and Robotics
- E-commerce Advantages: Amazon's leadership in robotics and automation within the e-commerce space is highlighted. Advancements in these technologies are expected to drive profitability and improve margins in the long term.
- Market Growth: Despite the slowdown in 2022, the e-commerce market is forecasted to grow significantly, and Amazon's strategic moves in expanding Buy with Prime demonstrate its strength in the online retail landscape.
5. Investment Opportunity
- Undervalued Stock: Despite recent challenges, Amazon's valuation at roughly 1.7 times expected forward sales presents a potential buying opportunity, especially for investors taking a long-term perspective.
The piece emphasizes that while Amazon faces immediate hurdles, its long-term potential remains robust due to its innovation, infrastructure investments, and advancements in e-commerce technologies.
This breakdown illustrates the interplay between macroeconomic factors, operational challenges, technological advancements, and market forecasts, all contributing to the analysis of Amazon's current position and future prospects.
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