Shares in Amazon (NASDAQ:AMZN) have been falling after the company’s most recent earnings report. I think this is a great opportunity for investors with a long-term focus.
Slowing growth in Amazon’s cloud computing business, combined with a cautious outlook, caused the share price to falter. But a combination of increasing revenues and widening margins put the stock firmly on my buy list.
Amazon Web Services
The main theme of Amazon’s earnings report was the performance of its cloud computing division, Amazon Web Services (AWS). Disappointing results combined with a cautious outlook caused the share price to fall on Friday.
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Cloud computing accounts for around 17% of Amazon’s overall revenues, but pretty much all of its operating income. Furthermore, it has been growing impressively, which is why it has been the focus of investor attention.
At its earnings report, Amazon announced 16% revenue growth in its cloud computing operations. In isolation, that sounds quite strong, but it left shareholders underwhelmed for a couple of reasons.
The first is that it means the rate of growth in cloud is slowing – revenues increased by 20% in the previous quarter. The second is that management announced that growth has been slowing further in April.
This seemed to overshadow a return to profitability across the company more generally and the shares slipped a bit as a result. But I think this narrow focus on the part of investors is a buying opportunity.
Outlook
Sales in cloud computing might be slowing, but I think there are a couple of reasons for positivity from the company’s earnings report. And these cause me to think the stock is a buy.
First, Amazon’s advertising division posted impressive revenue growth. Sales increased by 21% and it’s worth noting that this outpaced both Meta Platforms and Alphabet in terms of advertising growth between January and March.
I think the advertising business could be a really lucrative opportunity for Amazon. Its e-commerce platform gives it a number of useful data points that should allow it to build a powerful business in advertising.
At the moment, advertising accounts for around 7% of Amazon’s overall revenues. But I think this is a business that has clear scope to grow and should generate more than useful cash for the company in future.
Second, the organisation has been working to improve its overall profitability. Having achieved impressive growth in its e-commerce and cloud computer enterprises, it’s now looking to maximise profitability.
To that end, Amazon has been cutting back on its staff count and discontinuing some of its more speculative activities – like its telehealth ventures. I’m expecting this to drive significantly higher profits in future.
A stock to buy
Amazon isn’t an easy stock to buy – its cash flows aren’t in plain sight the way that they are with some other investments. It’s one that I think will take vision, foresight, and patience on the part of its shareholders.
But I also think that, for investors who are prepared to look beyond the most recent numbers and the immediate future, this could be a great investment. That’s why I’m buying the shares for my portfolio.
