As we head into the last month of the year, the S&P 500 is down 16%. That’s firmly stock market correction territory. Although it dipped lower than that at certain parts of the year, the potential bear market has not been borne out in 2022.
2023 may bring a resurgence of a bull market, or the market could slip further. If the market takes an upward swing, one thing that’s likely to happen in 2023 is that Amazon (NASDAQ: AMZN) will become a trillion-dollar company again.
It has been there before
With Amazon, it’s a case of when, not if. It has been there before, with its market cap reaching a high of nearly $1.9 trillion a year ago, back in the heyday of 2021. Its stock is now down 48% since that time, with a market cap of $950 billion.
The market being what it is today, there are only three companies valued at more than $1 trillion: Apple, Microsoft, and Alphabet. Amazon will join them again soon, and many other companies will get there over the next few years.
The state of Amazon
In the third quarter, sales growth for the e-commerce giant was still impressive. Revenue increased 15% over last year to $127 billion, with particular strength in the North American market, which grew 20%. But operating income decreased by about half, from $4.9 billion last year to $2.5 billion.
Management typically measures its progress in terms of operating income in place of net income, since it sees it as a more reliable measure of its overall health. Net income, or loss, takes into account factors such as its investments in Rivian Automotive, which has skewed its net income both positively and negatively over the past few quarters. Net income decreased to $2.9 billion in Q3, which was higher than operating income due to a pre-tax advantage from Rivian.
Cash flow has been heading downward as well, and it has fallen into negative territory for the first time in over a decade.
AMZN Free Cash Flow data by YCharts
Pulling its growth levers
Amazon is facing a few setbacks right now between rising costs, increased wages, supply issues, and inflation affecting retail spending. The economic downturn is even starting to affect Amazon Web Services (AWS), which was still strong in the third quarter but whose sales growth decelerated slightly.
Management isn’t worried. Amazon has been here before, and it’s rolling with the punches and setting the stage for continued growth. Like many tech companies, it’s doing a round of layoffs after a hiring spree to meet rising demand. It’s looking for many ways to cut costs now that demand is dying down.
It’s also redirecting its resources to generate higher revenue. It scrapped its previous healthcare venture, Amazon Care, and it’s launching a new version called Amazon Clinic with the resources from its acquisition of One Medical in April.
With Prime subscriptions topping 200 million, there’s plenty of cash still coming in and a strong moat around its core retail business. There’s also big potential in Amazon’s “just walk out” technology, which it’s licensing to other retailers. There’s no shortage of ways for Amazon to expand its business, but the main focus in this atmosphere is reducing expenses before it goes back into growth mode.
It’s going to go back
Amazon stock has lost a lot of its value plenty of times in the past. For example, Amazon stock declined by more than 50% from 2007 to 2008. But it has increased more than 4,000% since then, even at the current depressed price.
There are never any guarantees, but winners tend to keep winning. It seems to be just a matter of time until Amazon stock begins to gain again and it becomes a trillion-dollar stock, surpassing that level and rewarding shareholders.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Microsoft. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.