New year, same old question: Is this the right time to buy shares of Amazon AMZN? The stock underperformed the market in 2021, and investors shouldn't expect it to suddenly ramp up overnight.
Although it's true retail sales during the holiday season showed surprisingly positive preliminary results, Amazon’s CFO Brian Olsavsky has warned that fourth-quarter results will also bring “several billion dollars of additional costs." Still, Wall Street is confident things are about to change.
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Amazon Is More Than an E-commerce Company
Here's why I believe Amazon stock has lagged the S&P 500, the Nasdaq Composite index, and all other FAANG stocks: The market overestimates the relevance of Amazon's e-commerce segments and fails to recognize the importance of every other business the company has, especially AWS (Amazon Web Services).
For instance, revenue generated by AWS grew 33%, 29%, 29%, and 28% in the first, second, third, and fourth quarters of 2020, respectively. For the first, second, and third quarters of 2021, those figures were -- in order -- 32%, 37%, and 39%. A similar phenomenon occurred in Amazon’s “Other” segment, which is mostly advertising.
The company has managed to grow in much more profitable areas than e-commerce. This growth seems to be accelerating, regardless of the pandemic and other macroeconomic factors.
In fact, AWS possesses 81 availability zones through 25 regions globally and still plans to open 24 more availability zones and eight additional AWS regions. Yet Amazon stock hasn’t really gone anywhere.
E-commerce Results Are Likely to Improve
I'm not saying we should disregard the importance of Amazon's e-commerce business. In fact, the increase in Amazon’s operating expenses in 2021 -- due to supply-chain constraints and labor shortages -- are most likely transitory and should start to ease throughout 2022.
In addition, the Seattle-based behemoth has made several investments in its infrastructure, warehousing, and logistics networks. Although I don’t have great hope that Amazon’s fourth-quarter results will show significant changes compared to its most recent reports, I believe the company's e-commerce segments should regain profitability by the end of 2022.
Should You Buy the Dip?
It's impossible to predict whether Amazon shares will go up or down in the short term. Still, Wall Street analysts are unanimously bullish on the stock. Amazon was picked as Goldman’s top internet stock for 2022. And it's the main bet of other big firms -- including UBS, Wells Fargo, and Cowen & Co.
Of the 27 top analysts covering AMZN, all of them give it a strong buy recommendation, with prices ranging from $3,800 to $4,700. The average target price is $4,130, which would be a 23% upside.
(Read more from Amazon Maven: What to Expect From Amazon's E-commerce Business in 2022)
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Amazon Maven)