Amazon (AMZN -0.83%) has proven it can be a great long-term investment. The e-commerce giant's stock price climbed more than 600% over the past decade. In recent times, though, Amazon has put more frowns than smiles on investors' faces. That's because higher inflation and today's general economic environment have weighed on earnings.
That said, Amazon still is a leader in two high-growth markets: e-commerce and cloud computing. And future prospects look bright. So now the question is: Should you buy Amazon stock right away or wait?
A key profit driver
First, a look into Amazon's past. The company has grown earnings over time into the billions of dollars.
Amazon is most known for its e-commerce business. But the cloud computing business -- Amazon Web Services (AWS) -- actually is the company's biggest profit driver. Last year, for example, it accounted for more than 70% of Amazon's operating income. Amazon also generates sales through advertising on its e-commerce platform and subscription services like the Amazon Prime membership program.
This whole package helped Amazon increase its return on invested capital over time -- until about a year ago.
AMZN Return on Invested Capital data by YCharts
This brings us to the current problems. Rising inflation has pushed fuel and energy prices higher. That's added to costs of everything from running a warehouse to shipping packages. Higher inflation also means customers are thinking twice before spending. This includes both Amazon.com customers and people and companies using AWS.
A stronger dollar represents another challenge. That's because revenue generated internationally is worth less when exchanged into dollars. In the third quarter, this equaled a headwind of $900 million. That's more than Amazon expected.
As in the past few quarters, Amazon reported decreases in operating income and operating cash flow in the third quarter. And free cash flow shifted to an outflow of $19.7 billion over the trailing 12 months. That's compared to an inflow of $2.6 billion for the period ending last September.
Amazon predicts the impact of issues such as rising inflation and currency headwinds isn't over. These pressures are set to weigh on fourth-quarter earnings too.
Now or later?
So now, let's return to our question: Should you buy Amazon stock now -- or wait? Sure, Amazon has a great track record. But, as mentioned, today's challenges are hitting Amazon hard. And an earnings rebound won't happen overnight.
Right now, it's key to keep in mind the idea of investing for the long term. That means buying a stock and holding on for at least five years. If we look at Amazon from that angle, the picture looks a lot brighter.
Today, Amazon is trading for less than 2 times sales. That's its lowest number by that measure in more than six years. This looks cheap considering Amazon's past growth -- and what it's doing now to limit the impact of headwinds and ensure future growth. These steps should help Amazon come out stronger in the long run.
For example, this year, Amazon is cutting investment in its fulfillment network by $10 billion from last year's level. That's to better match supply with demand. The company doubled its fulfillment network earlier in the pandemic and found itself with excess capacity. Today's efforts should solve this problem.
At the same time, Amazon is increasing technology investment by $10 billion this year. That covers expansion of AWS infrastructure. AWS still represents Amazon's profit machine, so this is a smart move. The unit's sales and operating income continue to grow in the double digits. AWS should buoy Amazon through difficult times and drive growth into the future.
Yes, it's possible Amazon shares will decline further before rebounding. Or they could take off right away. It's impossible to time the market and buy at the very lowest price.
Here's the good news, though: If you invest for several years, ups and downs along the way won't make much of a difference in your overall performance. So, considering Amazon's valuation and long-term prospects, now is the time to get in on this solid long-term growth story.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
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