Why Amazon Stock Dropped This Week
What happened
Shares of Amazon.com (NASDAQ: AMZN) plunged 12% this past week, according to data from S&P Global Market Intelligence, furthering the decline in the online retail giant's stock price since its third-quarter earnings report on Oct. 27.
So what
Amazon's net sales grew by 15% year over year to $127.1 billion. Excluding foreign exchange movements, the e-commerce leader's revenue was up 19%.
However, sales growth at Amazon Web Services slowed to 27% from 33% in the second quarter and 39% in the year-ago period. AWS, as the division is often called, is Amazon's most important profit driver, so investors were understandably concerned about the deceleration in the segment's pace of expansion.
Moreover, rising fulfillment and labor costs weighed on Amazon's retail margins, while higher energy costs took a toll on the company's cloud computing operations. Amazon's operating income, in turn, plummeted 49% to $2.5 billion.
Amazon's guidance was even more worrisome. Management sees sales growth decelerating to only 2%-8% in the fourth quarter. The company's revenue forecast of $140 billion to $148 billion was below Wall Street's expectations of roughly $155 billion.
During a conference call with analysts, Chief Financial Officer Brian Olsavsky said that inflation and other economic concerns were driving consumers and businesses to rein in their spending.
Now what
Despite these near-term challenges, Amazon's long-term future remains bright. Its fuel, shipping, and electricity costs should moderate as inflation abates over time. And Amazon is working to make its massive fulfillment network more efficient after it doubled in size during the pandemic.
Most importantly, the shift to the cloud remains in its early innings. CEO Andy Jassy said in April that only about 5% of global information technology (IT) spending was in the cloud. Yet research firm Gartner projects that more than half of corporate IT spending in major markets -- including application software, infrastructure software, business process services, and system infrastructure -- could migrate to the cloud by 2025.
With these tech trends fueling its expansion, AWS is likely to remain a powerful -- and highly profitable -- source of growth for many years to come. So rather than sell, long-term investors might want to use the recent downturn in Amazon's stock price to buy some shares at a sizable discount.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Joe Tenebruso has the following options: long January 2024 $100 calls on Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
