Amazon‘s (NASDAQ:AMZN) stock performance was uncharacteristically flat in 2021 after having a monster year in 2020. But that doesn’t mean there aren’t plenty of exciting possibilities for this stock as we head into 2022.
After a 76% price runup in 2020, it’s actually not all that surprising that Amazon’s stock performance might ease up in 2021. the pandemic caused a lot of its gains to be pulled forward and management knew it would have to provide lukewarm guidance. There were a few other issues Amazon dealt with as well (details below) that made stock traders wary and Amazon only gained 2.4% in 2021. But that doesn’t mean the long-term bull case for Amazon has been derailed.
Short-term obstacles forced Amazon to adjust
Amazon’s bottom line was significantly affected by several macroeconomic conditions in 2021, especially in its e-commerce segments. First, the tight labor market in the U.S. caused wages to rise. Sign-on bonuses and other incentives were often paid to attract and keep quality employees. COVID-19 mitigation efforts also added costs. And the supply chain bottlenecks worldwide increased costs to source raw materials and logistics.
Finally, inflation caused Amazon to pay more for materials and services. All told, the company notes that these short-term headwinds added several billion dollars in costs to its Q3 2021 and Q4 2021 results. Because of this, Amazon’s North America and International segments swung to a combined net operating loss in Q3 2021, while the Amazon Web Services (AWS) segment remained highly profitable.
The investments in labor should pay off in the future as Amazon builds a solid, committed workforce. Supply chains should also begin to loosen during 2022 as the world continues to adjust to living with COVID-19.
Amazon Web Services on fire
Amazon’s overall revenue was up through the first three quarters of 2021 by 27.6% over the same period in 2020. Operating income gains were even more impressive, rising 33.7% year over year during those three quarters.
Much of this was on the back of the AWS segment. Revenue for AWS in Q3 2021 was up a whopping 39% year over year. The AWS segment had an operating margin of over 30% in the quarter as well. In fact, through Q3 2021, AWS made up just 13% of overall revenue but provided over 60% of Amazon’s operating income.
The global cloud computing marketplace is expected to expand significantly in the coming years and reach well over $900 billion by 2026, according to one study. Look for AWS to continue to make big strides in this segment in 2022 and subsequent years.
What’s on deck for Amazon?
Another area to watch moving forward will be Amazon’s efforts in digital advertising. Listed under “other” in Amazon’s financial statements, this source is starting to draw attention to itself. This chart demonstrates the growth has been incredible, and the top-line number, over $8 billion in Q3 2021 alone, is no longer an afterthought. Look for this number to jump in Q4 2021 due to the holiday advertising season.
Amazon is also competing with other tech companies for domination in broadband internet connectivity. Project Kuiper, as this Amazon subsidiary has been code-named, is working to provide a system of low Earth orbit satellites that will provide broadband services across the globe. Privately held SpaceX, led by Elon Musk, is developing a similar system. This is unlikely to affect results in 2022, but it will be fun to monitor the progress of this competition moving forward.
In other news, the FTC appears to be giving extra scrutiny to the company’s cloud services business. At issue here, and with Amazon’s other businesses, seems to be whether the company uses anti-competitive practices. These investigations often take several years to complete, and the ultimate disposition is unknown. But it is an issue investors need to be aware of and monitor.
Is Amazon stock a buy in 2022?
Amazon is currently trading at a price-to-earnings (P/E) ratio of just over 63. This is lower than historical averages. Investors may be concerned that the short-term headwinds will linger and further restrict results in 2022.
On the other hand, this could be present new investors with a great time to buy in. Labor woes and supply chain issues are forecast to ease sometime in 2022. Gains in the high-margin AWS segment appear here to stay. Advertising revenue is also mushrooming and looking like another big win for the company. In total, the future remains bright for long-term investors in Amazon stock.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.