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Amazon stock correction: a chance to get rich?

Young Caucasian man making doubtful face at camera
Image source: Getty Images

The Amazon (NASDAQ:AMZN) stock price has fallen by nearly 45% over the past 12 months. It’s now down 52% from its all time-high, reached in July 2021, when the company had a market cap of $1.9trn.

Amazon now has the dubious honour of being the first public company to lose $1trn in value.

Does this market correction make it a perfect time to add the stock to my long-term portfolio?

The top line

Amazon’s third-quarter results for 2022 demonstrate that it continues to be successful at increasing revenue. Net sales for the three months to 30 September were 15% higher than for the same period in 2021.

The company’s sales in the quarter were equivalent to $16 for every person on the planet!

Revenue in North America was up 20% and, ignoring the impact of foreign exchange movements, sales outside of this territory increased by 12%.

The greatest success came from its Amazon Wholesale Services (AWS) division, with an increase in sales revenue of $20.5bn (28%). However, this was the slowest growth rate since the results of AWS started to be separately disclosed.

It’s clear that the company is good at increasing its top line. But, what about profits?

The bottom line

Operating income for the third quarter was $2.5bn, compared to $4.9bn for Q3 in 2021. If it wasn’t for AWS, Amazon would have made an operating loss of $2.9bn.

Worryingly for existing investors, there appears to be a downward trend in net income. Amazon has recorded a loss during two of its last three quarters.

Annual profits were $11.6bn in 2019, $21.3bn in 2020, and $33.4bn in 2021. But, for the first nine months of 2022, the company lost $3bn.

Quarter

Net income/(loss) ($m)

Q1 2019

3,561

Q2 2019

2,625

Q3 2019

2,134

Q4 2019

3,268

Q1 2020

2,535

Q2 2020

5,243

Q3 2020

6,331

Q4 2020

7,222

Q1 2021

8,107

Q2 2021

7,778

Q3 2021

3,156

Q4 2021

14,323

Q1 2022

(3,844)

Q2 2022

(2,028)

Q3 2022

2,872

The company’s directors estimate net income to be between $nil and $4bn in the fourth quarter. Even at the higher end of this range, Amazon was barely profitable in 2022.

What should I do?

Restoring profitability is going to be difficult in the current economic climate.

Future growth is likely to come from AWS, a cloud platform enabling businesses to avoid having to invest in their own servers. Recurring revenue is earned via subscriptions.

According to MarketsandMarkets, the global cloud computing market will be worth $1.24trn by 2027. If correct, this would be an increase of 125% from its current size. At the moment, Amazon has a one-third share of this market.

Amazon is fundamentally a good company, but it’s clear that the threat of inflation, rising interest rates, and recession are affecting profitability. I think its stock price will continue to remain under pressure over the coming months, as earnings continue to disappoint.

I’m therefore not going to invest at the moment, but will take another look at the company later in the year.

The post Amazon stock correction: a chance to get rich? appeared first on The Motley Fool UK.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon.com. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2023