Amazon Stocks: Buy on Q3 Earnings Weakness

  • Amazon is facing considerable weakness in its core e-commerce sales.
  • The company’s cloud computing and advertising businesses could come to the rescue, as growth in those areas remains strong.
  • Hit by headwinds in the economy, AMZN stock has lost more than 30% this year, underperforming its large-cap tech counterparts.

It won’t come as a big surprise if Amazon.com (NASDAQ:) shows signs of losing growth when it reports earnings tomorrow after the market closes. .

The combination of a 40-year high of inflation and tight monetary conditions prompted consumers and advertising companies to cut spending, which hurt AMZN’s margins.

In addition, since the end of the pandemic, the e-commerce giant has faced considerable weakness in its core e-commerce sales as shoppers have stopped buying as many electronics or furniture in order to save money. money for meals out, trips and concerts.

Pressured by those troubles, Amazon’s North America division, home to its core online retail business in its biggest market, posted a third straight operating loss in July.

In fact, retailers across the United States are cutting prices to clear a stockpile of goods that are no longer in demand. Amazon’s decision to hold a second Prime Day this year indicates the online retailer could face similar issues.

With e-commerce sales slowing, Amazon investors are also worried about escalating costs after a massive pandemic-era expansion that left the company struggling to justify its vast warehouse space. and his inflated payroll. Order fulfillment spend jumped 14% to $20.3 billion, virtually the same as the previous three-month period.

Affected by these headwinds, AMZN stock has lost more than 30% this year, underperforming large-cap tech giants including Apple Inc (NASDAQ:) and Microsoft Corporation (NASDAQ:).

The bright side

While these pressures will continue to hurt the company this year and likely next year, investors have no reason to abandon AMZN stock. A period of weakness is usually the best time for innovative companies like Amazon to further strengthen their market share.

Amazon’s share of US e-commerce sales reached 40% in 2021, making it the fastest growing major US retailer in this segment. I don’t see this expansion slowing down, especially when e-commerce sales in the US were only 13.2% of total retail sales, with plenty of room for digital commerce growth.

Investors should also note that Amazon’s business is not limited to e-commerce. The company’s cloud computing and advertising units are still experiencing impressive expansion.

Amazon Web Services revenue grew 33% in the second quarter, while its advertising business, for which the company recently began to release financial data, grew 18% in the same period. According to Synergy Research Group, the company now owns 34% of the nearly $55 billion cloud infrastructure services market.

Given its healthy balance sheet, strong free cash flow, and highly diversified business model, it’s not hard to see that Amazon remains in a strong position to weather the current harsh economic environment.

In a note to clients today, JPMorgan reiterated its overweight rating on Amazon stock, saying the giant is “well positioned for long-term growth” ahead of Thursday’s results.

“We recently lowered our estimates due to increased currency headwinds and slowing discretionary spending. Nonetheless, we remain confident that AMZN can re-accelerate revenue growth and expand its operating margins in 2023, driven in large part by improving retail and continued solid growth at AWS.”

Amazon’s leadership position in many of the areas it operates in is the main reason most Wall Street analysts view its stock as a buy. According to an Investing.com poll of 54 analysts, 49 view the stock as a buy, and their 12-month consensus price target points to a 44% upside.

AMZN Consensus Estimates

Source: Investing.com

Of course, owning Amazon comes at a price, even though the stock has gotten cheaper this year. Currently, AMZN is trading at 50x forecast earnings over the next 12 months. The , on the other hand, has an average multiple of about half that figure.

Still, betting on the company has been hugely profitable for long-term investors, with its stock jumping around 900% over the past decade.

Conclusion

Amazon stock may show more weakness after the release of its latest earnings report tomorrow. This drop shouldn’t be a reason to feel pessimistic about the company’s future, given its dominance in e-commerce and explosive growth in its cloud computing and advertising businesses.

Disclosure: As of this writing, the author is long on AMZN, AAPL, and MSFT. The opinions expressed in this article are solely those of the author and should not be considered as investment advice.

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