Amazon (AMZN -14.05%) shares sank 14% in one trading session after the company’s first-quarter earnings disappointed investors. The retail giant reported decreases in operating cash flow, free cash flow, and operating income. Amazon announced a net loss compared to a profit in the year-earlier period. And sales increased only 7%.
This is a stark contrast to Amazon’s report a year ago, with gains in cash flow, operating income, and profit – and double-digit revenue growth. So, you might be ready to sell your Amazon shares. Or if you’re not a shareholder, you may want to avoid Amazon at all costs. But hold on for a minute. Let’s look at the one number that might change your mind.
Why Amazon didn’t deliver
First, a quick look at why Amazon didn’t deliver an earnings report of spectacular gains across the board. It’s not a huge surprise. The company has already spoken of challenges in its previous earnings report, such as inflationary pressures and labor supply shortages. That was in the fourth quarter of last year. At that point, cash flow had already begun to decrease – and sales growth had dropped into the single digits. In this latest report, Amazon spoke again of inflation and supply chain problems. The war in Ukraine also added to pressure on earnings.
“We see larger impacts of inflation, some line haul shipping rates, fuel, shipping supplies and wages,” Dave Fildes, director of investor relations, said during the earnings call.
So, that’s the bad news. Now, let’s move on to the good news. That’s the one number that could prompt you to add Amazon to your portfolio right now. And that’s the growth of Amazon Web Services (AWS), the company’s cloud computing business.
AWS posted a 56% increase in operating income in the quarter compared to the year-earlier period. The unit has traditionally been a key profit driver for Amazon. This means even if the retail business faces headwinds for a time, AWS could continue to power growth. AWS also reported a nearly 37% year-over-year increase in sales to more than $ 18 billion. The sales run rate on an annual basis is now almost $ 74 billion.
New contracts with major companies
AWS growth shows no signs of stopping. The business brought in new contracts with major companies such as Telefonica and Boeing. And AWS just launched 16 new zones in the US for the placement of its equipment and services – and 32 more worldwide are on the way. AWS is the market leader with a share that’s remained between 32% and 33% over the past few years, according to Synergy Research Group. That’s another reason to be confident about AWS ‘ability to continue driving growth at Amazon.
Of course, no one likes seeing dismal numbers from Amazon and weakness in the e-commerce business. But when that part of the company suffers, it’s encouraging to see that AWS has what it takes to keep growth going. That’s why, before selling Amazon shares, it’s important to take a close look at the company’s booming cloud computing business. You might decide to weather this storm. And if you don’t yet own Amazon shares, right now may be a good time to get in on this story for a reasonable price.