Shares of Amazon (NASDAQ:AMZN) fell sharply last week after the e-commerce giant provided a worse-than-expected revenue outlook for the final quarter of the year. The selloff has continued this week, wiping out almost all of Amazon’s post-pandemic gains and pushing its market cap below the $1-trillion mark for the first time in two and a half years.
The key factor behind a selloff was the Q4 revenue forecast, which is in the range of $140 billion to $148 billion, missing the consensus estimates of $155 billion. The disappointing outlook came due to rampant inflation and recession fears that continue to hurt consumers’ pockets. The company generated $127.1 billion in Q3, up 15% year-over-year, but still below the analyst consensus.
“There is obviously a lot happening in the macroeconomic environment, and we’ll balance our investments to be more streamlined without compromising our key long-term, strategic bets,” said Amazon CEO Andy Jassy during the earnings announcement.
AWS Slowdown A Major Red Flag
While Amazon is mostly known as an e-commerce behemoth whose platform is used by hundreds of millions of people around the globe, investors remain laser-focused on the performance of the company’s cloud business, Amazon Web Services (AWS).
Amazon reported AWS sales grew more than 27% year-over-year to $20.5 billion, though still short of analysts’ expectations of $21.1 billion. The report marked the slowest AWS growth since 2014, when the cloud division started reporting its earnings.
"The AWS slowdown is a clear sign that businesses are beginning to trim costs, so this will likely put more of a squeeze on Amazon's bottom line in the coming quarters," said Andrew Lipsman, principal analyst at Insider Intelligence.
AWS made up around 16% of Amazon’s total revenue in Q3, the data showed. The cloud-computing business, launched in 2006, held around 39% of the cloud infrastructure market in 2021, down from 41% in 2022, according to research firm Gartner.
Conversely, rivals, including Alphabet (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT) and Huawei, increased their cloud market share in 2021, Gartner reported. The cloud industry has been on an upward growth trajectory as businesses continued to shift their operations and storage to the cloud.
“The ongoing macroeconomic uncertainties have seen an uptick in AWS customers focused on controlling cost, and we are proactively working to help customers be cost optimized, just as we have done throughout our history, especially in periods of economic uncertainty,” said Amazon’s CFO Brian Olsavsky.
AWS reported an operating income of $5.4 billion in the period, compared with StreetAccount estimates of $6.37 billion. The unit’s operating margin shrank from 29% to 26.3% in Q2. Olsavsky added wage inflation and higher energy costs hurt AWS’s operating income.
Still, AWS remains one of Amazon’s key profit sources. The e-commerce giant reported $2.9 billion in profit in the quarter, a significant improvement from the previous quarter, when the company recorded a $2-billion net loss, mainly because of its bet on U.S. electric vehicle-maker Rivian.
Big Tech – The Last Bastion?
The Q3 earnings release came at a critical period for Amazon, which saw remarkable business growth during the coronavirus pandemic thanks to unprecedented demand for online shopping. But 2022 brought a completely different environment as consumers returned to stores, which hurt Amazon’s sales.
Similarly, Amazon's Q3 report suggests that not even a $1-trillion company is immune to the challenges facing the tech industry. Amazon shares are down more than 42% year-to-end, resembling a 2008 performance, when the stock declined around 45%. Overall, the 2022 performance marks one of the worst Amazon stock performances during a single year.
But it’s not only Amazon that has been battered by inflation and Federal Reserve’s tight monetary policy in 2022. This year marks a sharp U-turn from 2021, which was a booming year for many tech companies. Many analysts have been calling for a selloff in big tech as big names are usually the last to drop in a bear market.
For example, Apple shares (NASDAQ:AAPL) traded near their record highs just over two months ago despite raging inflation and a generally difficult macro backdrop. This is because investors see big tech, and especially Apple, are defensive names that can use their vast amount of cash to defend against slowing demand. Hence, a selloff in names like Apple (down 15% since August), Microsoft, Alphabet and Amazon could be the sign that we are nearing the end of this bear market.
Among big tech companies, Facebook owner Meta (NASDAQ:META) has been the worst-performing stock, plunging more than 72% year-to-date. The company warned its investors last week about another likely revenue decline in Q4, which would mark a third straight quarter of negative growth, and another expensive 2023 as, despite disappointing results thus far, Meta continues to ramp up its investments in the metaverse.
Conclusion
Amazon shares are trading more than 40% lower YTD after the company issued soft guidance for 2023. The ongoing selloff pushed Amazon’s market cap below the $1-trillion handle for the first time since the pandemic.
For Amazon investors, the focus now shifts to 2023 and whether the company can finally profit from vast investments in its fulfillment centers. As long as Amazon can prove that its revenues can increase on a sustainable basis, led by AWS, as well as deliver healthy margins, the stock will almost certainly outperform current levels given its years-low valuation.