With very few exceptions, 2022 has been a truly miserable year for equity markets around the world.
Popular FAANG stocks – such as Meta and Alphabet – have seen their share prices fall upwards of 35%, while the misery hasn’t limited itself to the IT sector either.
For instance, chipmakers have been hit by supply chain issues and labor shortage woes, with Intel and Nvidia losing almost half their respective worth. Even some oil and gas operations have seen severe drawdowns from their earlier annual highs.
However, few people could have anticipated how Amazon’s stock would get trampled down this year. The e-commerce giant appeared to be flying high throughout 2020 and 2021, yet its share price has declined 48% over the last twelve months.
So, as the bull thesis for the business looks increasingly less convincing with every passing day, it’s time to ask the question: will Amazon stock go lower in 2023?
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Negative Free Cash Flow Is A Major Concern
Profitability has always been a thorny issue for Amazon over the years. However, investors have usually been content to leave things alone so long as the company was showing decent growth in other key financial metrics.
But with expansion stalling due to inflationary and other macroeconomic pressures, that doesn’t seem to be the case anymore. In fact, despite the business clocking up a net sales increase of 20% in the North American division, operating income for the segment dropped by 147% year-on-year.
Indeed, Amazon’s business-wide operating income also fell by a massive 55% in the third quarter, to just $39.7 billion.
And yet, this decline was dwarfed in comparison to the scale of its free cash flow issues, which registered an outflow of $19.7 billion over the last twelve months. This represented a staggering 871% loss year-on-year – a situation made worse by the fact that AMZN hasn’t seen positive FCF since the third quarter of 2021.
The Cloud Business Is Starting To Underperform Too
Amazon Web Services (AWS) has probably been the most profitable enterprise for Amazon since the company started operations back in 1994.
Indeed, AWS is a comprehensive cloud platform solution that helps businesses scale their operations to gain a competitive edge. It allows companies to quickly set up and pay for data centers, servers and other resources on a pay-as-you-go basis, and provides identity management and networking features to ensure firms can manage their growing user base while connecting to edge locations across the globe.
Furthermore, with a 32% share of the cloud computing market, AWS has been a massive money-spinner for Amazon over the years. It has consistently innovated and added new functionalities while keeping prices low. This has, up until now, given it a big advantage over other cloud providers.
However, that might be about to change. Google Cloud is starting to rival AWS on several important fronts, and sports many other benefits compared to Amazon’s AWS.
For instance, Google’s public cloud computing is more flexible and scalable than traditional private alternatives, and has a fully encrypted data transmission protocol that’s more secure than other unencrypted options.
Additionally, Alphabet’s future-proof infrastructure is designed to be more resilient to change and easier to upgrade than older infrastructure. At the same time, its powerful data analytics products can help businesses make better sense of their data and find new insights they wouldn’t have found otherwise.
On top of that, GOOGL’s A.I. and machine learning algorithms are some of the most advanced in the world, and are helping enterprises process large amounts of data quickly and more efficiently. Finally, its microservices architecture and Kubernetes engine make it easy to deploy and manage applications in a modern way that many less technologically-savvy users prefer.
The result of this increased competition has seen AWS’s operating margin fall to its lowest level in the last year. In fact, its operating income growth has also cratered, dropping from 58% in the first quarter to a meager 1% in the third.
Yes, the cloud segment improved its revenues by 27% year-on-year – but considering that Amazon makes the vast majority of its profits from AWS, the operating margin and income growth decline remains extremely disappointing.
The End-of-Year Outlook Is Bleak
The company’s own guidance for the fourth quarter of 2022 appears pessimistic. Amazon expects muted revenue growth and a significant decrease in income. This is obviously not good news for shareholders, who have seen the stock price fall sharply over the past year.
While AMZN’s predictions may be conservative, it shows the firm is facing some serious challenges. One of those is the growing presence of competitors like Walmart and Target, who’re both making large investments in e-commerce and are starting to eat into Amazon’s market share.
In fact, with Brian Olsavsky, Amazon’s Senior Vice President & Chief Financial Officer, declaring in the company’s conference call that CapEx spending would be curtailed by about 10%, this could become an acute problem for Amazon in the future.
Another challenge is the slowing growth of the overall e-commerce market itself. While Amazon continues to expand in some segments, it’s worrying that its bread-and-butter business appears to be shrinking. This means that Amazon’s share of the pie is decreasing, even though its absolute growth remains resolute.
The last obstacle is regulatory pressure. The European Union has already fined Amazon for GDPR breaches, and there are investigations ongoing in several other jurisdictions. If Amazon is found to have violated antitrust laws, it could face substantial fines and additional penalties.
So, will Amazon stock go lower? While Amazon’s guidance for the fourth quarter may be pessimistic, it’s not entirely surprising given the complex situation the company finds itself in.
Therefore, shareholders should keep an eye on how these developments play out over the next few quarters.
Ultimately, the big question for investors is whether these headwinds are baked into the present share price or not. If they are, the stock could conceivably be considered cheap. But, if the market hasn’t yet responded, there could be more significant pain further down the line.
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