- Amazon (AMZN) stock is down 35% for the year.
- The retail stock collapse has wrecked cash flow in the short term.
- Advertising and the Cloud segments will soon have AMZN stock back on its feet.
Source: Tada Images / Shutterstock.com
Amazon (NASDAQ:AMZN) stock was one of the first stocks hit by the great sell-off in retail. Pity it’s not really a retailer.
The stock was due to open May 23 at $2,177, a market capitalization of just $1.09 trillion. You can say “just” in this case because it has lost 35% of its value this year. That’s thanks largely to a May wipe-out that took shares from $2,900 to $2,100 in two weeks. It was last at this level in the early days of the Covid-19 pandemic.
Amazon’s retail sales rate is second only to mighty Walmart (NYSE:WMT), and its stock has fallen alongside other retail names. But retailing, for all its size, is only incidental to the Amazon story. It is, and remains, a tech stock, with the broadest offering of any of the Cloud Czars.
The Next Big Trick
The purpose of Amazon’s store operations is to create cash flow it can invest in cloud data centers and other infrastructure. While Target (NYSE:TGT) results can be measured based on sales and store margins, Amazon is much bigger and broader.
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Amazon’s cash flow has been hit hard by the retail downturn. It was “only” $39.3 billion for the 12 months ending in March. For the quarter operating cash flow was even negative, by $2.8 billion.
The stock’s fall was not unjustified. But investors buy tomorrow, not yesterday. Cash flow should rise in the next quarters thanks to advertising. Amazon brought in $7.87 billion from ads in the last quarter, up 23% from a year ago. By way of comparison, Paramount Global (NASDAQ:PARA) brought in $5.4 billion in TV ads for all of 2021.
Most Amazon ads are inside the store, text and pictures for third-party sellers using its infrastructure. But Freevee, formerly IMDB TV, can now compete directly with other TV networks. Amazon is creating shows specifically for the channel, along with hosting older network shows such as Mad Men. With its own app, Freevee can also run on any streaming platform.
Freevee takes advantage of the fact that Amazon’s Fire streaming stick has 36% of the U.S. market and 6.4% worldwide. Freevee can also advertise Amazon’s Alexa speakers, which have a 26% share of their market.
The fact that Amazon has big competitors in all these areas, from Samsung (OTCMKTS:SSNLF) and Roku (NASDAQ:ROKU) in streaming, to Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Apple (NASDAQ:AAPL) in speakers, to Apple and Walt Disney (NYSE:DIS) in TV, also gives Amazon an argument against a break-up.
All this goes on top of its ad-free Prime TV streams, second only to Netflix (NASDAQ:NFLX) in that market at 19%. Netflix, meanwhile, rents capacity from Amazon Web Services. (I haven’t even mentioned Twitch gaming or the Kindle.)
AWS powers the whole magilla. The decision in 2005 to rent its cloud infrastructure, as it rents its warehouse and delivery capacity, may be the smartest business move ever made. AWS still has one-third of the cloud services market, as much as Microsoft (NASDAQ:MSFT) and Alphabet combined.
The Bottom Line on AMZN Stock
I have held strong to Amazon throughout the downturn. From the high I’ve probably lost $84,000 on my 60 shares.
But when the smoke clears this is one of the first stocks I will buy. That’s because Amazon is more than a retailer, more than a tech stock, even more than a streamer.
When Amazon was riding high, I suggested it should be broken up to make more money. That may have been smart government relations strategy. As a business strategy, it proved suboptimal.
As a “conglomerate,” Amazon can shift investment toward future growth without worrying about today’s results. It can look ahead several quarters, planning moves into finance, into healthcare, and more. Just as it did in advertising. Now is a good time to buy AMZN stock.
On the date of publication, Dana Blankenhorn held long positions in AMZN, AAPL, GOOGL and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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