It’s been a rough time for Amazon. The company announced lower-than-expected sales results and fourth-quarter sales guidance that missed analyst estimates during its most recent earnings call, resulting in a share price plunge year-to-date of 43.2%.
What does it all mean for Amazon? Is the stock a steal or is there more to fall?
First, let’s address the earnings report. Overall, Amazon saw revenue of $127.1 billion in the third quarter, representing a positive 15% growth year-over-year but missed analysts’ estimates of $127.8 billion.
Looking at the business segments, it’s clear that Amazon’s international and North American businesses are both doing well. International revenue was down 5% year-over-year to $27.7 billion (though this was due in part to foreign currency exchange rates), while North American revenue grew 20% year-over-year to $78.8 billion. AWS, Amazon’s cloud computing business, saw even more substantial growth, with revenue up 27% year-over-year to $20.5 billion.
So if Amazon slightly missed on revenue, but their businesses are all seeing solid growth, why was the stock hammered?
The reason comes down to two key factors: first, guidance, and second, market conditions.
On the guidance front, Amazon projected fourth-quarter revenue to be in the ballpark of $140 billion to $148 billion, which falls below analyst estimates of $155.15 billion. This was enough to spook investors in a market that is already skittish about spending.
As for market conditions, there have been rising concerns about a reduced labor market. Amazon’s staggering growth owes a lot to its ability to rely on a vast pool of low-cost labor. With the U.S. unemployment rate dropping to 3.5%, there is less available labor to draw from. Without this crucial source of growth, Amazon won’t be able to maintain its fulfillment center operations at the same level, which would eventually lead to slower growth and lower margins.
Amazon’s Big Wins
Nevertheless, Amazon had some big wins this quarter. One of Amazon’s largest verticals, Prime Video, saw 15 million viewers tune in for Thursday Night Football. If Prime Video can continue to grow its sports user base and content offerings, it will be a crucial driver of long-term growth for the company.
In addition, Amazon’s Lord of the Rings series debuted with a record 25 million streams on its first day. This is a big win for Amazon, as it cements the company as a serious player in the content space and will attract more top talent to create new content.
AWS, Amazon’s cloud computing business, might have slowed down from the 33% growth it saw in the second quarter. However, it still generated $20.5 billion in revenue. AWS is a core pillar of Amazon’s growth strategy, and with companies like Netflix, Samsung, and BMW all using AWS to power parts of their operations, it is clear that the business has a lot of long-term potential.
This is becoming an increasingly important part of Amazon’s business, and one investors are keen to watch. In 2021, AWS represented 74% of Amazon’s operating profit, and its growth is helping to offset slower growth in other parts of the business.
Why Amazon’s Focus on the Cloud Is Important
Cloud computing has been one of the most important advancements in information technology in recent years. Amazon is a leading provider of cloud services, and while the last earnings report might suggest that growth is slowing, the overall trend is still very positive.
The cloud is changing how businesses operate because it allows them to outsource their IT needs to a third-party provider. Companies no longer have to invest in their hardware and software or hire staff to maintain these systems. Instead, they can pay for access to a cloud platform, which is much cheaper and more efficient.
Amazon knows that it’s not “if” the cloud will completely take over but “when.” That’s why the company is investing so heavily in its cloud offerings. By doing so, it is helping to drive the adoption of cloud computing and position itself as the leading provider of these services. For long-term investors, their focus on the cloud is a positive sign.
The future of Amazon
Despite the earnings miss and weak guidance, Amazon is still in a solid position. It is the clear leader in e-commerce and cloud computing, two of the world’s most largest and fastest-growing industries.
What’s more, Amazon continues to invest heavily in new areas with huge potential. It recently announced plans to launch AWS Asia Pacific and AWS Middle East (UAE), which would be their second in the region. This shows that management is continuing to expand the company’s reach and presence in key international markets.
Investors should also remember that Amazon is a long-term play, and the company is still in growth mode. It is making significant investments that will pay off down the road. For example, it is currently building out the Prime Air drone delivery service and expanding the AWS cloud computing business.
When you put all the pieces of the puzzle together, fair market value sits at $123.31 per share by our calculations, representing 27.4% upside.
The bottom line is that Amazon is a great company well-positioned for long-term success. While the stock may be volatile in the short term due to market conditions, investors with a long-term time horizon can feel comfortable holding or adding to their positions.