Amazon (AMZN -14.05%) It announced first-quarter earnings for fiscal 2022 after markets closed on Thursday. Investors were disappointed, and Amazon stock fell more than 15% the day after the report. With Amazon’s market capitalization of more than $1.5 trillion prior to the release, the decline wiped out more than $150 billion of shareholder wealth.
The massive sale has led some potential investors to “ditch the tires” and wonder if they should buy Amazon now.
Slowing sales and rising costs are not ideal
In the first quarter, ending March 31, net sales rose 7% to $116.4 billion from the same quarter a year earlier. Last year, the world was in a more restrictive shopping environment. People were more hesitant about shopping in person and looked to Amazon to avoid stores. As a result, Amazon sales rose 44% in the first quarter of last year. So this year’s modest growth should be seen in the context of the unsustainable high level of last year.
A slowdown in growth is to be expected, not a worrying sign. However, what appears to be a problem is the high expense. Amazon’s shipping costs, in particular, are up 14% from a year ago, despite shipping the same number of units. economic inflation Supply chain problems are hitting economies around the world, and Amazon has not delivered. To make matters worse, Amazon has spent heavily during the pandemic to make sure it can meet the increase in demand. In fact, it now has 1.62 million employees, up from 1.3 million in the fourth quarter of 2020. It now has a higher fixed cost base, and sales are slowing.
Higher costs drove operating income to $3.7 billion in the first quarter, down from $8.9 billion in the same quarter last year. Management expects slower sales and higher costs to continue in the second quarter. It forecast revenue growth of 5% and operating income of $1 billion, both in the middle of the second quarter. There sure was a lot to be disappointed about Amazon’s earnings announcement, and it is understandable that the stock fell the next day.
However, there were some Shining points, highlights, highlights. Amazon’s Web Services (AWS) posted 37% year-over-year growth. The business is more profitable than e-commerce sales, and now makes up 16% of the company’s total sales, up from 13% at the same time last year.
Similarly, Amazon’s ad sales grew 25% to $7.9 billion in the first quarter. Like AWS, ad revenue is more profitable than e-commerce, so growing segment faster than business is good news for long-term profitability.
Should you buy Amazon shares now?
After Amazon’s earnings report, heavy selling saw it trade at 2.7. By this metric, Amazon’s stock is the cheapest in more than five years. It is undoubtedly facing near-term headwinds as economies reopen and struggling with rising costs. But Amazon has proven its ability to face challenges and deal with them effectively. Amazon’s long-term prospects outweigh the near-term challenges, and investors can feel good about buying Amazon stock The long-term.