It feels to me as though the January sales have come early as far as stocks are concerned. I’m looking to take the opportunity to double down on a couple of my investments before Christmas.
Amazon.com
Top of my list is Amazon.com (NASDAQ:AMZN). The stock has fallen by around 44% since the start of the year.
It’s not hard to see why the stock has been struggling this year. Rising interest rates have been putting pressure on stocks that trade at high price-to-earnings (P/E) multiples.
Amazon absolutely fits into that category. Even after this year’s declines, the stock trades at a P/E ratio of around 88.
There’s an obvious risk that this could continue. But for me, the falling share price is an opportunity to buy more shares.
Earnings
One thing to note about Amazon is that the company’s earnings this year took a significant hit from an asset impairment charge. I think that makes the stock look more expensive than it is.
Back in April, the company announced a $7.6bn writedown of the value of its stake in electric car manufacturer Rivian. That caused net income for the quarter to turn negative.
An asset impairment charge isn’t a good thing. But I’m looking at the long term and I don’t expect it to be an ongoing concern.
In my view, the things that drive Amazon’s profitability are still as powerful as they were at the start of the year. That’s why I’m looking to double down in December.
Outlook
Despite the headwinds, I think that the outlook for Amazon is positive. Most of the key metrics look like they’re moving in the right direction to me.
Across the board, net sales have been increasing. Online store sales increased by 7%, subscription service revenue increased by 9%, and advertising service sales were up by 25%.
The real cash engine of the business, though is AWS—the company’s web services division. At Amazon’s most recent earnings report, it announced that AWS revenue was up by 27%.
I think this is a sign of a business that is faring well. The company continues to reinvest for growth and this looks to me as though it’s paying off.
Patience
I’m happy to be patient with Amazon shares. In my view, Amazon.com has been a casualty of investors seeking companies that generate cash immediately.
To my mind, that’s perfectly reasonable, but I think that Amazon’s investments have resulted in a company that has some assets that are unique. Over time I expect these to pay off.
Warren Buffett once said that he didn’t understand why anyone would sell a stock when they’d owned it at a higher price and the business was in better shape. I feel that way about Amazon.
I think that the factors that have been weighing on the company’s share price will prove to be temporary. That’s why it’s on my list of stocks to buy in December.
