Amazon.com, Inc. (NASDAQ:AMZN) is a vast and complicated company with operations in the e-commerce, cloud computing, advertising, and other areas. While this article mainly focuses on the e-commerce sector and its cyclicality, I rate Amazon stock as a buy primarily because of its robust cloud and advertising businesses, which enjoy quicker growth and greater profitability.
What Happens to Amazon Stock During the Holiday Season?
Amazon’s quarterly revenue increase during the fourth quarter is attributable to increased expenditure during the holiday shopping season.
Amazon often enjoys a comparable boost in cash flow in the fourth quarter; for several years, Amazon’s free cash flow was negative for three quarters but significantly positive in the fourth quarter.
Like other giant retailers such as Walmart (NYSE:WMT), Amazon has a history of successfully collecting a large portion of consumers’ holiday spending through aggressive advertising and discounts. That strategy has worked effectively for the corporation, as indicated by its steady Q4 revenue increase.
This year, Amazon is starting the holidays early with an early access offer for Prime members on October 11 and 12. This appears to be a trend this year, with Walmart, Kohl’s (NYSE:KSS), Macy’s (NYSE:M), Bed Bath & Beyond (NASDAQ:BBBY), Target (NYSE:TGT), and Best Buy (NYSE:BBY) all hosting “holiday” specials in early October.
Shopping events are being moved earlier this year since holiday spending is likely lower due to inflation and other macroeconomic challenges. According to Adobe Analytics, online sales are predicted to increase by only 2.5% in November and December this year, compared to 8.6% last year. This will be the weakest rate of growth since 2015.
With fewer bucks to go around, businesses are fighting harder for their fair share of their consumers’ wallets, and the sooner they throw their hat in the ring, the more likely they are to come out on top. Some of these shops also suffer from inventory concerns, and reducing things now will help them move surplus inventory more quickly. According to Adobe Analytics, gadgets will be discounted by an average of 27% this year, up from 8% last year, owing to inventory difficulties.
Although Amazon produced the most revenue in Q4, its stock did not generally fare the best in Q4. Amazon stock has returned 3.2% on average in the fourth quarter over the last five years. This compares to an average yearly return of 37% for Amazon shares from 2017 and 2021. So, while returns have been positive, investors should not expect the best returns in Q4 simply because Amazon makes the most revenue in that quarter. Growth is typically measured on a year-over-year basis. Thus each Q4 is compared to the previous year’s great Q4 rather than the current year’s Q3.
Why Is Amazon Stock Price Falling?
While aggressive advertising and discounting to drive revenue growth have proven to be an effective approach for Amazon, the impact on the bottom line has been less pronounced. Amazon’s quarterly operating income often increases in the fourth quarter, although the trend is significantly less stable when compared to the sales increase.
Amazon’s free cash flow fell into negative territory in 2021 for the first time in over a decade. This drop is one of the primary reasons Amazon stock peaked in July 2021 and has since fallen 40%.
Of course, there have been other factors that have contributed to the decline. The general market is down more than 25% this year, and while Amazon has typically outperformed the market, generating profitable returns in the face of a market crisis is challenging. Amazon’s revenue growth has also slowed this year, reaching its worst rate since at least 2010, as the company faces challenging Covid comps.
Is Amazon Stock a Buy, Sell, or Hold?
In the short term, Amazon’s best-case scenario is that operating income grows significantly in Q4 thanks to a good holiday season. This has happened in the past; for example, in 2014, Amazon’s operating income would have been negative if not for the fourth quarter, but after reporting a great fourth quarter, Amazon stock soared 27% in the first quarter of the following year when results were released.
However, with demand being sluggish and Amazon’s competitors actively discounting owing to inventory difficulties, Amazon may not have a successful Q4. The whole market could continue to fall, with cyclical consumer brands like Amazon bearing the brunt of the fallout. If the company becomes highly aggressive with its discounts, it may continue to see diminishing operating margins.
In the medium term, Amazon stock’s performance is anyone’s guess. It is impossible to forecast the strength of the holiday shopping season and its influence on Amazon’s top and bottom lines. Even if one does, it does not ensure that Amazon stock will move the same way as Amazon’s business metrics in the short run. For months or even years, market volatility might overwhelm actual earnings results.
In the long run, I’m cautiously optimistic that Amazon will be able to get back on track. This is primarily due to its AWS and advertising divisions, which are less cyclical than e-commerce and have higher margins and faster growth. I’ve discussed these categories in greater detail in previous writings. Still, in short, I expect they will create significant free cash flow and operating income growth for Amazon in the future years. That is based on my understanding of where cloud computing is now and where it could go in 10 years as a software engineer.
Amazon stock is a buy today if investors can stomach investing in a firm that is currently less lucrative and shareholder-friendly than its major tech and big retail counterparts.
Featured Image – Megapixl © Jetcityimage
