Will Amazon Recover in 2023?

Some shocking Amazon stats to close out 2022. The share price practically halved during the calendar year. Amazon shed over $830 billion in market value. So, what will 2023 hold? Amazon is our pick for stock of the week.

As is so often the case, the chart tells the story. Price has fallen right back to those 2020 Covid lows. One of the reasons valuation is so tricky is because it depends on so much more than the micro company level. It’s the interaction between the macro and the micro that matters to form a big picture of what’s actually happening.

For example, Amazon’s 2019 revenue was $280 billion. In the twelve months to September 30th 2022, that figure hit $502 billion. Purely on that (simple) basis, is it reasonable for this company to be worth approximately the same amount in these two snapshots of time, even though 2022 revenues are practically double 2019?

There must be more to the story. And there definitely is… Profits! (or net income, to use the bean-counting terminology).

• Amazon annual net income 2019: $11.59 billion
• Amazon annual net income 2020: $21.33 billion
• Amazon annual net income 2021: $33.36 billion
• Amazon 12 months to September 30th 2022 net income: $11.32 billion

In the last earnings report, Amazon guidance didn’t do much to quell investor fears. More weakness is expected in Q4.

Amazon CFO Brian Olsavsky says the company will “tighten our belt, including pausing hiring in certain businesses and winding down products and services where we believe our resources are better spent elsewhere”.

Amazon has invested heavily in their logistics network over the past two years, anticipating a continuation of the online spending growth seen during the pandemic era. Will these investments bear fruit?

Amazon Web Services has been a continual bright spot. Growth has slowed, but the same is true of competitors such as Microsoft’s Azure.

To some extent, every business is a passenger to the macro environment that drives the economic bus. And, with central banks tightening, the energy price spike in 2022, inflation rising, and stimulus measures waning, the question now is just how much money there will be to go around in 2023.

For all of Amazon’s positives, investors may look to consumer staples as a safer bet, anticipating that discretionary spending will slow. Or perhaps US government debt which is paying almost 4.71% on the 1 year bond…

However, there’s little doubt that Amazon is trading at a discount relative to recent history. After a pretty dismal performance in 2022, the stage could be set for a comeback. Especially if inflation keeps falling and central banks start making the right noises about pivoting.

It looks unlikely that this will happen early in 2023, but plenty of unlikely things have happened over recent years so it’s worth being prepared!

For all the talk of a brand new world of higher inflation and even more US-China tensions weighing on Amazon’s business model, it’s easy to forget that the world still keeps turning, trade will keep happening.

If Amazon can cut their overheads and leverage the investments of the past couple of years, profits could pick up and potentially provide a boost to the depressed share price.