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Will Amazon Stock Beat the Market in 2023?

Last year was one of the worst years in Amazon‘s (AMZN -0.61%) history, as the stock lost half of its value. It’s on pace for its slowest year of revenue growth ever. The company is laying off 18,000 corporate workers and taking other cost-cutting moves, like closing dozens of warehouses and shuttering unprofitable start-up businesses like Amazon Care.

Looking ahead to 2023, investors are hoping for a comeback. But will they get one? Let’s see where the company’s headed this year.

Amazon in transition

2022 was a transitional year for Amazon, and 2023 is shaping up to be one, as well. The company, now led by CEO Andy Jassy, seems to be realizing the limits to its growth.

For years, Amazon plowed money into a wide range of projects, aiming to gain market share and worry about profits later. That strategy has paid off handsomely in some instances.

Amazon Web Services, its cloud infrastructure unit, has grown to be a profit machine, while other businesses, like advertising and its third-party marketplace, are also believed to be highly profitable. Amazon doesn’t break those out individually.

Outside of AWS, the company lost more than $8 billion through the first three quarters of 2022. This shows how overexpansion during the pandemic and a number of money-losing businesses like Alexa, which reportedly lost $10 billion in 2022, have torched its profits.

With the company now generating more than $500 billion a year in revenue, it has become much more difficult for Amazon to grow at its historical rate of 20% or more, and the company will need to focus on profitability, rather than revenue growth. It has a number of levers to pull as it aims to improve profitability, and the results of its layoffs and other cost-cutting efforts should begin to bear fruit later this year.

The market landscape

Whether Amazon can beat the market this year depends not only on its performance, but also on that of the overall economy and the stock market. Amazon is a cyclical business.

On the e-commerce side, it sells mostly discretionary products in both the first-party and third-party channels, and AWS is also sensitive to business spending. CFO Brian Olsavsky noted headwinds in the recent earnings call, saying, “With the ongoing macroeconomic uncertainties, we’ve seen an uptick in AWS customers focused on controlling costs.” Amazon also guided to revenue growth of just 2%-8% in the fourth quarter, an unusually slow growth rate, showing it’s feeling those headwinds in the consumer business, as well. 

The stock’s sell-off last year came not only because of the company’s poor performance, but also because of rising interest rates and the market’s reaction to an anticipated recession. If the economy does get a “soft landing” — meaning the Federal Reserve can raise rates without sending the economy into a deep recession — Amazon looks like a good candidate to outperform. However, if the economy spends much of the year slowing down even more, it’s possible that Amazon stock could continue to slide as its performance is likely to get worse. On the other hand, it’s possible that the Fed would adjust its aggressive strategy in that scenario and things might not pan out as poorly for Amazon.

The good news

Regardless of the potential outcomes laid out above, one thing is certain: After falling 50% last year, Amazon stock is as cheap as it has been in several years, according to metrics like the price-to-sales ratio (P/S). The stock now trades at a P/S of just around 2. The cost-cutting measures above should also give a boost to Amazon’s profit margins, and the company should continue to grow, even in a difficult economy. This may help it gain leverage, as long as it controls costs.

Famed value-investor Bill Miller, whose portfolio has beaten the S&P 500 every year for 14 years in a row, recently forecast that Amazon’s free cash flow would reach $60 billion in just three years as AWS continues to put up strong growth. The company is also expected to pull back on capital investment in new infrastructure, like warehouses and data centers.

Taking that perspective, Amazon looks like a good bet over the long term no matter what happens this year. It’s difficult to predict any stock’s performance on a one-year horizon, but with its discounted valuation, competitive advantages in areas like AWS, and a tailwind from the rebound in the economy when that happens, Amazon seems likely to outperform over the next few years.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in The Motley Fool has positions in and recommends The Motley Fool has a disclosure policy.

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