Even Amazon (AMZN 0.78%) has been unable to escape the repercussions of this terrible economy. Amazon posted its fourth-quarter revenue guidance on its end-of-September 2022 report, showing only 2% to 8% year-over-year growth, and as of Dec. 20, the stock had sunk 24% to a 52-week low. Considering market experts think there will be a recession in 2023, you might wonder if now is really the time to buy this stock.
However, wise investors are buying Amazon as it sits near its 52-week low. Here's why.
Prime is the crown jewel
Prime might have started as a way to make e-commerce more acceptable by providing free two-day delivery. However, it quickly became the world's most incredible loyalty and retention subscription service. For instance, market research company Statista estimated that U.S.-based Prime members have a 93% retention rate after the first year and 98% after two years.
Retention rates are significant for a retailer as selling to loyal customers is more straightforward and less costly than pouring cash into marketing to attract new customers. Plus, loyal customers tend to buy more than new ones. You can see this in a 2019 Statista survey that shows U.S.-based Prime members spent an average of $1,400 on Amazon each year, compared to $600 spent by non-Prime members.
Today, Prime offers far more than just two-day delivery. It now offers unlimited streaming of movies and TV episodes, Prime Reward cards, Amazon Music, Prime Gaming, and many other perks -- an entire ecosystem of products and services of which Prime serves as a customer loyalty hub.
While no one outside of Amazon is privy to whether Prime is profitable on paper, Prime generates tons of proprietary first-party data on its 200 million global subscribers, which the company monetizes in many fruitful ways, such as advertising.
NASDAQ: AMZN
Key Data Points
Focus your attention on Amazon's ad business
Almost everyone knows the success of Amazon's e-commerce and cloud services, but only some know that advertising is emerging as its most promising business.
While advertising only makes up 7.5% of Amazon's revenue, that revenue is growing at 30% year over year in a terrible ad market, compared to Amazon Web Services (AWS), its next fastest-growing segment, increasing revenue by only 28% at the end of the third quarter. Furthermore, this ad revenue growth is very profitable. Although Amazon doesn't directly disclose its advertising profitability, you can infer its approximate operating margin by looking at operating margins from Google's ad business, which was 32% in Alphabet's third quarter. During times of a healthy ad market, these margins have risen as high as 40% -- very profitable growth. Suppose Amazon's ad business achieves a comparable margin to Alphabet's of between 32% and 40%; it would exceed AWS's average operating margin of 29.6% over the last six quarters.
The best part for investors is Amazon ads, already a larger ad business than YouTube, continues to grab market share from the two ad behemoths Google and Meta Platform's Facebook, just as it has for the last several years. And its share gains are likely to continue. Amazon's huge advantage is that its ad platform costs less for advertisers and creates more sales than its larger adversaries.
Investors should look for the ad business to drive Amazon's revenue and profitability once the online advertising market rebounds.
Online retailing is not immune from inflation and rising interest rates
On the third-quarter 2022 earnings call, Amazon CFO Brian Olsavsky admitted the company's sales were slowing and attributed the trend to high fuel prices and rising energy costs pressuring consumers and businesses. In addition, the Federal Reserve responded to high inflation by raising rates, which strengthened the dollar, negatively impacting foreign exchange rates.
A rising dollar creates adverse outcomes for U.S.-based companies like Amazon when selling products in foreign markets like Europe, as products exported to countries outside the U.S. are more expensive, resulting in less demand and fewer sales. In addition, when a U.S.-based company brings cash back from foreign markets, exchange rates will reduce the value of foreign-denominated currency -- lowering earnings.
Suppose you are an Amazon investor; you should only expect a revenue, profitability, and stock price rebound when the Federal Reserve changes from raising interest rates to reducing rates.
Amazon sells for a price-to-sales (P/S) ratio of 1.7; the last time it traded at a P/S ratio this low was in 2015. As a result, many investors consider the stock undervalued, a holiday present for investors looking for a solid "buy the dip" opportunity.
