3 Reasons Long-Term Investors Love Amazon
Amazonit is (AMZN -0.99%) Share prices jumped more than 11.6% in response to the company’s strong second quarter results (ended June 30). Now the stock is down 14.4% so far this year.
Investors and analysts have been impressed with the tech titan’s ability to execute. Let’s review the three reasons why long-term investors may consider this stock a great buying opportunity now.
AWS remains the undisputed crown jewel
Amazon has long been known for its e-commerce business and extensive distribution network. However, Amazon Web Services (AWS), the industry leader in cloud infrastructure services, has become the main driver of growth. Despite soaring inflation and the technical recession (two consecutive quarters of declining gross domestic product) in the United States, global enterprise spending on cloud infrastructure services increased year-over-year by 29 % to reach $55 billion in the second calendar quarter. Management believes this is only the first step in cloud adoption in the enterprise and public sector space and expects demand for cloud infrastructure to continue to increase over the of the next quarters.
AWS accounted for 34% share of this global market in the second quarter, up 1 percentage point sequentially. This cloud business generated $19.7 billion in revenue, up 33% year-over-year. Despite the impact of increased employee stock-based compensation expense due to higher wage inflation, AWS’ operating margin increased year-over-year by 0.7 percentage point to reach 29%. AWS also reported a 65% increase in backlog year over year, implying that AWS will have a strong project pipeline for the coming quarters.
AWS is undoubtedly the most valuable business for Amazon, given that it only contributed 16.28% of the company’s revenue, but accounted for almost -all of its operating profit. The company is focused on investing in expanding its sales force and infrastructure capacity for AWS into new geographies. While this is expected to result in margin contraction for AWS in the coming quarters, over the long term it will increase Amazon’s revenue and margin exposure to the highly profitable AWS business.
The advertising industry is growing
Amazon has had great success in targeted digital advertising because it not only promotes products and services to people with high purchase intent, but also at the point of sale. The effectiveness and measurability of Amazon’s advertisements have become even more relevant in the context of AppleExchange confidentiality. In the second quarter, the company’s advertising revenue increased 18% year over year to $8.8 billion.
E-commerce is growing
Despite a slowdown in consumption, Amazon’s e-commerce business showed signs of strength. According to Insider Intelligence, Amazon accounts for 37.8% of e-commerce activity in the United States, a market estimated to be worth more than $1 trillion in 2022.
Amazon struggled to cut labor costs and excess warehouse capacity, which resulted in more than $6 billion in additional costs in the first quarter. Those costs fell to $4 billion in the second quarter as the company focused on downsizing and improving the productivity of its fulfillment network.
Despite macroeconomic tensions, Amazon managed to hold its most successful Prime Day ever in July 2022. While a record-breaking Prime Day won’t have a huge impact on this giant’s finances, it should attract more members subscribed to Amazon Prime (a recurring event). source of income) in the coming quarters. Additionally, the deal with Grubhub, which entitles Prime members to a free one-year subscription to the Grubhub+ service for free restaurant delivery, may also help expand the Prime member base.
Is Amazon a good investment?
In the second quarter, Amazon’s revenue rose 7% year over year to $121.2 billion, ahead of the company’s revenue forecast as well as consensus estimates. While this single-digit growth pales in comparison to the company’s historic double-digit revenue growth, it highlights the resilience of the company’s business model in the current precarious economic environment. Amazon’s operating profit fell 57% year-over-year to $3.3 billion, well above the company’s guidance range, which ranged from an operating loss of $1 billion to an operating profit of $3 billion.
Amazon is valued at 58.5 times forward earnings, the lowest the company has traded since January 2021. The discounted price makes the stock even more attractive to retail investors.
However, it’s not all sunshine and roses for Amazon. Although revenue has grown steadily, the company posted negative free cash flow of $23.5 billion in the past 12 months ending in the second quarter. The company’s overreliance on AWS for profitability also exposes the company to business concentration risk.
Despite these risks, in the context of high-flying AWS business, resilient e-commerce business, and strengthening advertising business, Amazon may prove to be a solid buy-and-hold choice. for long-term retail investors.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Manali Bhade has no position in the stocks mentioned. The Motley Fool holds positions and recommends Amazon and Apple. The Motley Fool recommends the following options: $120 long calls in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.