Amazon (AMZN -0.20%) reported earnings for the first quarter of fiscal 2022 after markets closed on Thursday. Investors were disappointed, and Amazon shares fell more than 15% the day after the report. With Amazon’s market value above $1.5 trillion before launch, the crash has wiped out more than $150 billion in shareholder wealth.
The dramatic sell-off has some potential investors “kicking the tires” and wondering if they should buy Amazon now.
Slowing sales and rising costs are not ideal
In its first quarter, which ended March 31, net sales increased 7% to $116.4 billion from the same quarter a year ago. Last year, the world was in a more restrictive purchasing environment. People were more hesitant about buying in person and were searching Amazon to avoid stores. As a result, Amazon sales increased 44% in the first quarter of last year. Therefore, this year’s modest growth must be seen in the context of the unsustainably high level of the previous year.
A slowdown in growth is to be expected and is not a worrying sign. However, what does seem problematic is the increase in expenses. Amazon’s shipping costs, in particular, were up 14% from last year, despite shipping the same number of units. Inflation and supply chain problems are affecting economies around the world, and Amazon was not spared. To make matters worse, Amazon had been spending aggressively during the pandemic to make sure it could meet the surge 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.
Rising costs caused operating income to fall to $3.7 billion in the first quarter, from $8.9 billion in the same quarter last year. Management expects the slowdown in sales and rising costs to continue in the second quarter. It forecast revenue growth of 5% and operating income of $1 billion, both at the midpoint of the second quarter. Certainly, there was a lot to be disappointed about with Amazon’s earnings announcement, and stocks understandably fell the next day.
That said, there were some bright spots. Amazon Web Services (AWS) posted 37% year-over-year growth. The business is more profitable than its e-commerce sales and now comprises 16% of the company’s total sales, up from 13% in the same period last year.
Similarly, Amazon ad sales grew 25% to $7.9 billion in the first quarter. Like AWS, advertising revenue is more profitable than eCommerce, so growing the segment faster than business is good news for long-term profitability.
Should You Buy Amazon Stock Now?
Following Amazon’s earnings report, the selloff has it trading at an asking price of 2.7. By this metric, Amazon shares are the cheapest in more than five years. It certainly faces short-term headwinds as economies reopen and grapple with rising costs. But Amazon has shown that it can meet and deal with challenges effectively. Amazon’s long-term prospects outweigh short-term challenges, and investors can feel good about buying Amazon stock for the long term.