There are plenty of questions out there about whether Amazon stock is still a good buy. A growing number of investors are questioning the company's growth prospects due to a series of issues, including declining margins in its cloud computing division, AWS, as well as operating losses in its e-commerce business.
Amazon's growing operating losses in e commerce busines
Amazon's e-commerce revenue has declined and operating income has fallen over the last few quarters. Although the company has not yet declared a loss, investors have been worried that the e-commerce giant is struggling. Amazon is one of the largest e-commerce companies in the world and has hundreds of millions of customers. However, many worry that the company is losing control of the shopping experience, particularly for third-party marketplace sellers. The company's operating expenses have also increased, which is contributing to the decline in profit.
According to the company's latest earnings report, its e-commerce sales declined 4% in Q2 2022, compared to the previous year. This decline is due to the fact that fewer people are shopping online. Amazon's net income was down a large amount compared to the prior year's third quarter, dropping to $2.9 billion, from $8.4 billion in the second quarter. While traffic to Amazon's website has slowed, prices on some items have increased, but the number of products that are being sold is falling.
Amazon's international operations are suffering. The company said its loss widened to $2 billion from $911 million in the third quarter. The increase in costs is primarily because of an increase in shipping, fulfillment, and transportation costs. Amazon has also been dealing with the impact of supply chain disruptions. In addition to this, the strong dollar has weighed down on international sales.
The company has been putting together a plan to reduce its losses. Its chief executive, Andy Jassy, has been aggressively cutting costs since taking over as the company's CEO last year. He has increased incentives for employees to stay, but he has also scaled back plans to open warehouses. Nevertheless, the company has been aggressively hiring during the recent labor crisis, securing more than 1.5 million employees by the end of the third quarter.
While the e-commerce market is still growing, it is not growing at the rate that it needs to. As a result, it is in danger of running into overcapacity, which is a problem. Even if the market continues to grow, it is still vulnerable to a number of factors, including inflation and wage rates. Amazon is trying to limit its exposure to these risks by cutting staff and shifting resources away from its e-commerce business. Amazon's CEO, Andy Jassy, has been working to improve efficiency in its fulfillment operations. A two-day Prime Day sale in July helped boost e-commerce sales. But, in the long run, Amazon may need to scale back the number of warehouses and store openings it has. One option would be to raise fees for its FBA services. Another is to increase advertising. Both of these options could lead to additional profit.
Amazon has been able to generate profits in other areas of the company. It has invested in a variety of businesses, including real estate, gaming, fashion, and entertainment. Additionally, it owns a stake in Rivian Automotive, a startup that is developing an autonomous car.
Amazon's shrinking margins in AWS
Amazon's (NASDAQ:AMZN) third quarter earnings report showed a surprising decline in the AWS operating margin. While many analysts were expecting a 23 percent margin, it actually fell short at 17 percent. Despite the disappointing margin, the overall revenue growth was stronger than expected. This is partly due to currency headwinds, but the overall growth rate also looks good on a constant currency basis.
AWS is Amazon's cloud computing service, which offers virtualization, storage, networking, and security. It is an integral part of the company's overall earnings. In fact, the AWS division has been the largest cash cow for Amazon. As a result, its profits support a large number of Amazon's large scale investments. Without AWS, Amazon wouldn't be able to make these investments. The AWS division is also facing intense competition from Microsoft Azure and Alphabet's Google Cloud. Its margins aren't as high as they were a few years ago, but it's still a big money maker.
But the competition will eventually push down AWS margins, and it's likely to be an ongoing issue. Fortunately, Amazon is working with its customers to find ways to optimize their AWS spend. For example, it is allowing customers to swap out their existing servers with cheaper Graviton chips. Another solution is to give bigger discounts to attract new clients. There are plenty of other ideas as well.
If Amazon can't overcome the AWS competition, its stock will likely suffer. Currently, the stock trades for more than 43 times next year's expected earnings. This is a big deal for a company that has been on a multiyear growth streak. However, it's not a great sign for investors. They may start to think that the stock is not worth the price. Although AWS is a major contributor to Amazon's overall revenue and profits, its margins are still small. That's why it's important to monitor its performance. Not only will it help you understand what to expect from Amazon's stock in the future, but it will also help you get a sense of how the company performs against its rivals. Historically, big technology companies like Microsoft (NASDAQ:MSFT) and Google have had margins of over 50 percent. Amazon isn't in that league, but its gross profit is around 22 percent. That's the same as the size of the Microsoft Windows division, which had an operating margin of 60 percent.
While there are several factors at play, including the commoditization of cloud services, the competition will certainly have an impact on AWS margins. With more competitors, it will be harder for AWS to get the prices it needs to gain market share.
On the positive side, Amazon's AWS segment has grown a lot over the past few years, contributing nearly 2 percent of its total revenue. In addition, its operating income has been growing, albeit at a slower pace. And it still ranks as the most profitable division of the company.
Is Amazon stock still considered a buy?
Amazon has been making headlines lately. Its e-commerce business is experiencing supply chain problems that have caused a slowdown. At the same time, the company has made some big bets in the media and advertising spaces. The result is that its overall business is poised for growth. But does the stock still make for a good investment?
The price of Amazon stock is down 47% so far this year. However, it has been up over 125% in the past five years. This is not necessarily a bad thing, as it means that investors are getting a better value for their money. When you buy stocks, you are paying for the benefits you will get, as well as the risks you will take. In this case, you may be interested in a stock that is in the right risk category for you.
Amazon's cloud computing business is a standout. The company's enterprise value is estimated at $1.2 to $2 trillion, which is about 20 times what it would be if it were valued purely by its market cap.
Amazon's retail business is also important. The company's online stores are a major source of revenue. However, the margins on these sales have dwindled. Consequently, it has become more expensive to maintain them. Additionally, the cost of fuel and food has increased to the point where it is affecting discretionary spending. As a result, the company has taken steps to cut expenses.
Moreover, the company has invested in robotics and telehealth. While those areas are growing, it is important to understand the fundamentals of each of those areas before making a decision. For example, do the companies have the financial capability to take on a massive new investment? What are the prospects for their long-term success? If the answer is no, then the stock will suffer in the short-term.
A new initiative, the Amazon Clinic, will provide virtual care for patients in 32 states. It will offer a message-based service to treat common medical issues, and the company will build upon its existing OneMedical and Amazon Pharmacy brands. Amazon has a number of other growth levers that have not yet reached their peak performance. These include its cloud-computing and advertising businesses, which are also worthy of a look. Despite its woes, it still has room to grow, and the odds are that it will be around for a while.
Amazon has many other notable businesses, including a strong position in robotics and telehealth. But the stock's most impressive feat is probably its advertising services unit, which generates outsized growth rates.
If you're looking to buy Amazon stock, you can start by determining the amount of stock you want to invest in. You can choose from fractional shares to full-sized shares, as well as a variety of commission-free options. Once you have the right amount, you can open a brokerage account and start your investing journey.