AMZN: One Reason to Buy and One Reason to Sell
Amazon (AMZN) - Get Free Report is the very best example of a roller-coaster stock. Shares skyrocketed in 2020, when the company leveraged its titanic size to absorb the vacuum left by brick-and-mortar stores shuttered by COVID.
However, its titanic size comes at a titanic cost. In 2021, Amazon started to show productivity losses. And in 2022, the company presented its first bottom-line miss.
Now Bezos’ juggernaut divides bulls and bears, leaving the question: Is AMZN a buy or a sell? The answer could be both.
Figure 1: AMZN: One Reason to Buy and One Reason to Sell
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(Read more from Wall Street Memes: This Is Why JP Morgan Is Bullish on Amazon Stock)
E-commerce Showing Signs of Fatigue
Amazon’s e-commerce revenue can be broken into online stores, physical stores, third-party sellers, subscription services, and advertising.
The online stores have been showing clear signs of saturation, because they haven’t presented any meaningful growth for the last four quarters.
On the other hand, physical stores and third-party sellers have been growing. Still, they are low-margin businesses that require massive investments with no short-term profitability.
And investing solely for the long run has been quite expensive these days: In both the first and second quarters, Amazon’s operating cash flow decreased 40% on a year-over-year basis.
As a result, the Seattle-based company was forced to close two of its warehouses, as well as abandoning its plans to open 42 new ones. It has also shut down its telehealth service, Amazon Care; closed underperforming brick-and-mortar stores; and frozen its corporate hirings for 2022. Yes, these are frugal times.
Inflation-Proof Growth
As investors watch Amazon’s e-commerce segment tumble, they might believe the company as a whole is a bad investment. However, the Seattle-based behemoth has a peculiarity: Most of its revenues come from e-commerce, but its profits come from its cloud-computing business, Amazon Web Services (AWS).
Because AWS is Amazon’s real profit driver, e-commerce revenue growth is not as nearly as relevant as the cash brought in by the cloud arm. And the good news is that AWS has been growing at least 30% a year, even amid economic recession fears.
Such a high-margin and rapidly growing business becomes hard to ignore. As Amazon remains the leader of the cloud industry, bullish investors believe that the cloud arm will compensate for its e-commerce sister.
The Time Horizon Matters
Both Amazon's e-commerce business and its cloud-computing unit dominate their respective markets. Amazon owns over 40% of the U.S. e-commerce market and a third of the cloud market. Yet the first is struggling to grow and produce any real income, while the second has both.
So which scenario seems more plausible: e-commerce segments draining the profitability brought by AWS or AWS’ vast amounts of cash lifting e-commerce up? I personally believe that answer depends on the timing.
In the short-term, e-commerce really is draining AWS’ profitability and may continue to do so. Still, Amazon's e-commerce issue is external, rather than internal, due to the effects of macroeconomic conditions. It will hardly last forever.
Therefore, it’s safe to say that Amazon still stands out as a promising investment for the long term.
(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)
