After struggling last year, Amazon (AMZN -1.20%) stock has seen some encouraging rebound momentum early in 2023's trading. But while the the company's share price is now up roughly 18% year to date, it still trades down roughly 47% from its valuation peak.
Is now the right time to be buying the tech giant's stock, or does it still present too much downside risk at current prices? Read on for wildly different takes on this debate from two Motley Fool contributors.
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Bull case: Great opportunity beyond near-term headwinds
Keith Noonan: It's admittedly a bit tough to get a read on the near-term performance outlook for Amazon right now. Revenue grew 9% year over year to reach $149.2 billion in the fourth quarter, coming in ahead of the company's own guidance and the average analyst estimate, but key business segments continued to see some sluggishness in the period.
While Amazon Web Services (AWS) still grew 20% year over year in the fourth quarter, momentum for the key, profit-driving cloud-infrastructure business still came in below the market's expectations and was down from growth of 27.5% in the prior-year quarter. A combination of weakened demand catalysts and high costs for the e-commerce business and a write-down on the company's investment in electric vehicle company Rivian caused net income to fall to $300 million, down from $14.3 billion in Q4 2021.
With the company's guidance calling for sales between $121 billion and $126 billion in this year's first quarter, the midpoint of Amazon's target calls for revenue growth of roughly 6% year over year. That's admittedly much slower than the growth investors have been told to expect in any year prior to 2022, but there's still plenty of opportunity here for long-term investors.
From a valuation perspective, Amazon's forward price-to-sales multiple looks quite low on a historical basis.
AMZN PS Ratio (Forward) data by YCharts
While the company's sales growth has slowed dramatically and naturally necessitates a lower price-to-sales ratio, Amazon's core e-commerce and cloud infrastructure businesses are still positioned for long-term success, and its digital advertising business has continued to rapidly grow sales. This is still a company with category-leading positions in key industries, and there's a good chance that it will return to posting stronger sales and earnings growth when operating headwinds ease.
I also think that there's a good chance that Amazon will be one of the biggest beneficiaries of the artificial-intelligence (AI) revolution. While much of the attention surrounding AI is currently centered around chatbot initiatives from companies including Microsoft and Alphabet, Amazon has long been working on artificial intelligence projects of its own, and there's a good chance that some of those projects will start to come into focus before too long and bear meaningful fruits over the long term. In particular, I think that advances in warehouse and delivery automation will drive significant margin improvements for the company's massive e-commerce business.
Amazon is a great company, and its current valuation leaves room for long-term investors to enjoy very strong returns with the stock.
Bear case: Amazon spent billions to sustain an excellent customer experience
Parkev Tatevosian: Amazon might be an excellent company with wonderful long-term prospects, but the next several quarters will be challenging. Amazon experienced a surge of new customers and orders during the earlier stages of the pandemic. As a result of the burst, Amazon's existing capacity was insufficient to fulfill consumer demand.
Predicting how much it needed to expand was a difficult calculation, considering the unprecedented nature of the pandemic. Amazon chose to err on the side of overinvestment rather than under.
As economies reopened and consumers had more options on where to spend their time and money, Amazon's growth decelerated. That left the company with too much capacity, which is weighing on profitability.
Indeed, while revenue grew by 9.4% from 2021 to 2022, operating income more than halved to $12.2 billion from $24.9 billion. Unfortunately, Amazon's capacity investments in things like planes, warehouses, and delivery vans are not something it can reduce quickly or effectively. Management has said it will take some time for it to grow into these investments.
Managing a business through the ups and downs of the pandemic was not easy. Amazon chose a customer-friendly option. Maybe that pays off in the long run with better customer loyalty. I'm just not sure that investors should ride along with Amazon while it spends several quarters, perhaps several years, rightsizing its business.
Should investors buy Amazon stock now?
While Amazon is clearly a great business, investors should still weigh their personal risk tolerance and expectations for the company before buying shares. High operating costs and a relatively sluggish near-term sales growth outlook for the e-commerce business may mean that more risk-averse investors will want to steer clear of the stock right now.
On the other hand, Amazon remains well positioned in the e-commerce, cloud computing, and digital advertising industries, and the company's impressive penchant for innovation could help it emerge from near-term challenges and go on to enjoy new growth phases.
For long-term investors looking to add top tech companies to their portfolio, taking a buy-and-hold approach to Amazon stock at today's prices could be very rewarding.
