Inflation peaked at 9.1% in June 2022 but has eased every month since, declining to 6.4% in January 2023. However, many companies are still feeling the effects of the rising cost of living. For instance, Amazon (AMZN 0.03%) experienced steep declines in its e-commerce business last year, reporting over $10 billion in operating losses in its online retail segments.
Despite the challenging year, Amazon remains dominant in more than one high-growth industry. As a result, there are bulls and bears for Amazon’s stock, making an investment in the company complex. So, let’s look at both arguments and determine whether now is the right time to buy shares of Amazon.
Amazon likely has a fruitful long-term future
Although online spending slowed in 2022, the e-commerce market is nowhere near hitting its ceiling. Last year, online sales made up 19.7% of all worldwide retail sales, with that figure expected to hit 24% in 2026. Meanwhile, in the U.S., 14.8% of all retail sales were done online in 2022, up from 5.4% in 2012.
Moreover, according to Grand View Research, the e-commerce market was valued at $9.09 trillion in 2019 and is projected to expand at a compound annual growth rate (CAGR) of 14.7% through 2027. Considering Amazon holds a leading 37.8% market share in e-commerce in the U.S., the company is well positioned to profit significantly over the long term. For reference, the second-largest market share is Walmart, with 6.3%.
In addition to dominance in e-commerce, Amazon has a lucrative position in cloud computing with Amazon Web Services (AWS). Grand View Research claims that the cloud computing market was worth $483.98 billion in 2022, and it expects it to grow at a CAGR of 14.1% through 2030. In other words, AWS’ leading 34% market share is still a major reason to invest in Amazon’s stock.
In fact, the company already sees significant gains from the cloud market. Despite declines in its e-commerce earnings in 2022, AWS’ $22.8 billion in operating income, a year-over-year rise of 23%, kept the company growing amid macroeconomic headwinds.
Amazon shares are down 36% year over year, having risen 14% since Jan. 1. With considerable market share in two high-growth markets, buying the dip is worth considering.
Potentially more attractive buys than Amazon stock
Despite Amazon’s stock falling 49% throughout 2022, the company’s shares still seem expensive compared to the competition. The economic declines of last year led Amazon’s free cash flow to fall significantly below its peers’, as seen in the table.
The chart suggests Amazon’s free cash flow is on the rise. However, its current position means its price-to-free-cash-flow ratio is 239.67, compared to Apple, Alphabet, and Microsoft, which are between 20.74 to 32.46. Amazon’s performance under economic strain compared to the competition makes its business feel less reliable than other options. The chart above shows how other companies were able to grow or keep their free cash flow steady while Amazon’s plunged.
Meanwhile, throughout 2022, Amazon’s stock fell significantly more than Apple’s, Microsoft’s, or Alphabet’s:
The combination of poor financial performance and a significant stock decline has led Amazon’s price-to-earnings ratio to currently sit at 77.1, compared to Alphabet’s 19.5, Apple’s 22.06, and Microsoft’s 26.65. The metrics illustrate how Amazon’s current stock price is far more expensive than those of these other tech titans.
Amazon likely has a lucrative long-term future as the king of e-commerce and cloud computing. It also has a strong outlook as the home to a top-performing streaming service with Prime Video and plans to grow in telehealth and consumer robotics. However, it might be best to invest in better-valued stocks for now and keep an eye on Amazon for the right time to strike.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Apple, Microsoft, and Walmart. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.