Shares in online shopping and cloud computing giant Amazon (NASDAQ: AMZN) have had quite a pullback. Only a few months ago, Amazon’s share price was hovering around the $3,400 mark. Today however, it’s near $2,200 – the level it was in April 2020 at the start of the pandemic.
In the past, buying AMZN stock after big pullbacks has turned out to be a very profitable move. So is this latest share price fall a great buying opportunity for me? Let’s take a look.
Four reasons to buy Amazon shares in 2022
Looking at the investment case for Amazon stock today, there’s a lot to like, in my view. I think the biggest appeal of the company is the growth it’s generating in its cloud computing division, AWS.
In the first quarter of 2022, revenue in this segment came in at $18.4bn, up 37% year-on-year. Looking ahead, I expect cloud revenues to continue rising rapidly. This section of the market is projected to grow by around 15-20% a year over the next five years and Amazon is the sector’s leader with a 33% share.
I also like the fact the company now has 200m+ Prime users. This is a big deal as these tend to spend more on its e-commerce platform. They also provide the company with a mountain of data that it can use to develop its artificial intelligence capabilities. It’s worth noting here that Amazon recently lifted its Prime fee in the US from $119 to $139. This extra cash will go straight to the bottom line.
Another appeal here is the growth the company is generating in its advertising division. In the last quarter, advertising revenues amounted to $7.9 billion, up 23% year-on-year. This segment could still be in its infancy too.
Finally, the valuation also seems reasonable. If we use next year’s earnings forecast (for the year ending 31 December 2023) of $53.10, the forward-looking P/E ratio here is about 42. That is high on a relative basis, but I’m comfortable with it given Amazon’s brand power (it’s one of the biggest brands in the world), growth, and dominance in cloud computing and e-commerce.
Risks
There are a few risks to consider here though. One is the performance of the group’s e-commerce division in the short term. Ultimately, Q1 results show that Amazon’s online shopping business is not well suited to the current inflationary environment.
Higher costs for staff, freight, and logistics are hammering the bottom line. For the quarter, operating income fell to $3.7bn, compared with $8.9bn in the first quarter of 2021. For Amazon’s profits to recover, it needs inflation to moderate.
A second risk is around consumer spending. Right now, a lot of consumers are struggling due to high energy costs. If they start to cut back on spending, Amazon, which sells a lot of discretionary goods, could be impacted. It’s worth noting that for Q2, the business forecast sales of between $116bn and $121bn. Analysts had been expecting $125.5bn (which is one reason the share price tanked after Q1 results).
Amazon shares: my view now
Overall however, I think the stock has a lot of appeal after its recent pullback. The share price could continue to be volatile in the near term. But in the long run, I expect it to move higher.
