the Standard & Poor’s 500 It’s down about 19% since January 3, 2022, which practically puts it in bear market territory. But shares Amazon (AMZN 3.72%) They’ve fared much worse: They’re down 49% since then, and now they’re down 54% from their all-time highs.
Explaining why such a complex company is suffering this kind of decline seems daunting. However, I think looking at the company’s operating income provides a simple explanation. And after understanding this issue, it becomes easy to answer the question of what Amazon’s prospects will look like in 2023.
Amazon is the largest e-commerce company in the US, has a huge logistics network, has international operations, and runs a powerful cloud computing platform, Amazon Web Services (AWS).
There are many things to talk about with every aspect of Amazon’s business just in terms of developments in 2022. But zooming out to just observe Amazon’s operating income over the past five years shows that the metric has an undeniable relationship with share price.
For experienced investors, this wouldn’t be surprising: Dividends drive stock performance over the long term. Operating income is one way to measure profitability.
For Amazon, AWS pays more operating income than any other part of the business. In 2021, AWS generated $18.5 billion in operating income, up 37% year-over-year. It accounted for 74% of Amazon’s total operating income.
However, in 2022, the draw from e-commerce operations is too great for AWS to beat. Inflation caused expenses to rise, the number of workers in fulfillment centers increased, and management spent heavily on streaming video content on Amazon Prime. During the first three quarters of 2022, Amazon’s North American division posted an operating loss of $2.6 billion, compared to an operating income of $7.5 billion in the corresponding period of 2021.
The segment loss of $2.6 billion overshadowed AWS’ bright $17.6 billion in operating income.
As Amazon’s operating income increased in 2020, so did its share price. But now with lower operating income, Amazon stock has fallen to a three-year low.
If changes in operating income offer a simple explanation for Amazon’s share price decline, the key question for investors is whether operating income can recover in 2023 and beyond.
This year, Amazon has a chance to improve when it comes to its North American e-commerce division. First, inflation in the US appears to have peaked over the summer, which will make it less relevant in 2023. Second, the company has just announced another wave of layoffs, which will help it tackle the problem of headcount.
However, there are some question marks regarding AWS in 2023. In the third quarter of 2022, its contracted revenue backlog was $104 billion. But that was up just 4% from the prior quarter — the slowest reported sequential growth for the AWS backlog.
Depending on how bad the economy is and the timing of Amazon’s contracts, AWS’s growth could slow, affecting the operating income the sector generates.
However, the $100 billion backlog is nothing to sneeze at, and points to Amazon’s ability to generate value beyond 2023. So even if the stock doesn’t recover this year, I think it will in time.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is on the board of directors of The Motley Fool’s. John Quast holds positions at Amazon.com. The Motley Fool has posts on and recommends Amazon.com. The Motley Fool has a disclosure policy.
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