Investors with the foresight to buy Amazon stock during its May 1997 IPO have realized astonishing returns. Since its launch, Amazon stock has gained more than 125,700 percent, and it is preparing for a stock split that is likely to deliver additional returns.
However, recent events have some investors thinking that Amazon’s winning streak is over, but that’s highly unlikely. There is far more to Amazon than online shopping, and the additional business units have plenty of room to grow.
Amazon Is More Than eCommerce
Amazon is no longer just an eCommerce site, though it does control more than 25 percent of the eCommerce market in the United States — and that’s if you only count products sold by Amazon. When third-party merchants are included, the figure is much higher.
In addition to retail sales, Amazon Web Services (AWS) holds more of the cloud computing market than its next two competitors combined. Amazon is at 33 percent of the market share, while Microsoft Azure controls 21 percent. Google Cloud is in a distant third place, with just 10 percent of the market share. It’s worth noting that while AWS is highly profitable, Google Cloud is operating at a loss.
All of Amazon’s business units saw tremendous growth throughout the pandemic. Cloud computing and eCommerce were in high demand as consumers spent more time at home, and Amazon was fully prepared to meet those needs. However, the high growth rate during the pandemic created an unexpected challenge.
How could Amazon top those numbers and continue to produce steady growth post-pandemic? Well, it couldn’t — particularly given obstacles like rising inflation, supply chain breakdowns, and an exceptionally tight labor market.
Why Did Amazon Stock Go Down?
Amazon reported its first-quarter results on April 29, 2022, and investors were deeply disappointed. Product sales were down, there was a significant operating loss in the US and international eCommerce segments, and the company had a dramatic loss of free cash flow. In short, no one was expecting Amazon to post a quarterly loss – its first since 2015 – and the response was immediate and merciless.
Investors began selling off shares, which caused Amazon stock to drop 14 percent by the time the market closed on the 29th. In the weeks since, Amazon stock has gone down even more. Year-to-date, share prices have declined more than 35 percent.
Does that mean Amazon stock will continue to decline, or will Amazon stock recover? And if recovery is likely, is now the right time to buy?
Will Amazon Stock Go Up?
There are several reasons that investors can be confident Amazon stock will go up long-term, even if its short-term prospects aren’t promising. First, eCommerce is here to stay, pandemic or no pandemic. Online sales were on a strong growth trajectory before COVID-19, and the events of 2020 and 2021 merely hastened the inevitable.
Yes, consumers are trickling back into the world of brick-and-mortar shopping, but that doesn’t mean eCommerce will plateau or stagnate. In 2020, eCommerce made up 17.9 percent of global retail sales. That increased to 19 percent in 2021, and it is expected to reach 20.3 percent in 2022. By 2025, eCommerce will make up more than a quarter of all retail sales, and Amazon is a leader in the eCommerce space.
Aside from its existing eCommerce services, which include opportunities for third-party merchants to sell through Amazon, the company is introducing a brand-new feature that could pull market share away from other eCommerce giants like Shopify. “Buy with Prime” will give merchants the opportunity to offer fulfillment through Amazon Prime’s massive delivery network — and shipping is free for consumers who have Prime memberships already.
Profits from the Amazon Web Services business unit offset eCommerce losses for the first quarter. AWS contributions to Amazon’s top-line and bottom-line results are growing, and demand for cloud computing is expected to increase alongside advanced technologies like artificial intelligence (AI), machine learning, virtual reality (VR), and augmented reality (AR). Such technologies require an enormous amount of computing power, which makes on-demand services through cloud computing a must-have.
Finally, Amazon’s digital advertising business must not be overlooked. Based on 2021 results, which topped $31 billion, it is the third-largest in the industry. Only Google and Facebook generate more revenue from online marketing. Amazon is investing heavily in growing this segment of the business, and if successful, digital advertising may become a critical component of Amazon’s long-term growth strategy.
Is Amazon Stock a Buy?
It’s true that Amazon had a bad quarter, and the rest of the year might not be much better. However, the challenges facing Amazon are temporary, and its strengths are enduring. Careful financial analysis demonstrates that Amazon’s upside is substantial — as much as 38.6 percent based on a discounted cash flow analysis.
The consensus from the 37 analysts who made recommendations on Amazon stock over the past three months is that it is a strong buy. Their price targets average $3,695.95 per share, but even the low estimate – $2,800 – represents impressive gains.
Deals like this don’t come around often, and chances are this one won’t last long. Between Amazon’s opportunities, potential upside, low current price, and upcoming split, now is the right time to buy Amazon stock.