Amazon Stock: Should You Buy It in October 2022?
Amazon (AMZN) - Get Free Report shareholders have been through an emotional roller coaster this year. In the early months of 2022, Wall Street analysts were confident the stock would regain its winning streak. That led many of them to select AMZN as their top pick for the year.
However, Amazon has been unable to overcome the selloff in the equities market, despite even a 20-for-1 stock split and positive second-quarter earnings. Year to date, AMZN is down nearly 30%.
But although Amazon shareholders may feel discouraged about the stock's performance in the last couple of years, holding onto the stock could still prove to be profitable in the long run.
Figure 1: Amazon Stock: Should You Buy It in October 2022?
Getty Images
(Read more from Amazon Maven: Is Amazon Stock a Buy? Here’s What One Expert Has to Say)
Why Is Amazon's Share Price Falling?
Let's start by addressing why Amazon's share price is dropping in the first place.
First, there is the whole macroeconomic problem, which is completely out of Amazon's control.
After the Federal Reserve announced another 75-basis-point interest rate hike in an attempt to quell rampant inflation, the equities market took a nose dive. Giant growth stocks like AMZN saw even bigger losses.
Plus, supply-chain constraints and rising transportation costs have trimmed the profitability of Amazon's e-commerce business and depleted its cash flows. In the second quarter (Q2) of 2022, operating cash flow fell to $35.6 billion — a 40% drop year over year.
Second, there is the micro perspective.
Amazon has been facing cost pressures — mostly from its fulfillment network infrastructure — and productivity losses from overstaffing. This recently led the company to freeze recruitment for corporate roles in its retail business until the end of the year.
How Does AMZN Look for the Long Term?
As opposed to this short-term view, the long-term horizon looks positive.
Amazon remains the market leader in two rapidly growing fields: e-commerce and cloud computing.
U.S. e-commerce is forecasted to nearly double in size from 2021 to 2025, hitting the $1.3 trillion mark. Because Amazon holds around 40-50% of the market, investors can expect growth not only in its online shopping platform, but also in its advertising arm — which has been presenting solid growth rates for the past few quarters.
The outlook for the cloud computing industry is even better: This market is poised to surpass $1 trillion by 2028, growing at a 15.8% compound annual growth rate (CAGR).
Because the Seattle-based behemoth holds a third of the market share here, investors can expect Amazon to add a significant portion of cloud revenue growth to its coffers.
Is Amazon an Undervalued Company?
In the end, what matters most is the price investors are paying.
In this light, Motley Fool contributor Keithen Drury has provided an interesting insight on why Amazon's stock might be undervalued.
Thinking hypothetically, Drury wrote that the company is split into three different enterprises:
- e-commerce
- advertising
- Amazon Web Services (AWS), its cloud-computing unit
By adapting and applying the sales multiples of comparable companies to these three parts of Amazon, Drury concluded that Bezos’ behemoth is worth $1.5 trillion.
Dividing that figure by the number of shares outstanding would result in a price target for AMZN of $147 per share. That would be a 22% upside.
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Amazon Maven)
