As the stock market toys with officially crossing the threshold into a bear market, investors are looking at one of their best opportunities to find bargain growth stocks to buy.
Rampant inflation, rising interest rates, and protracted supply chain issues have conspired against businesses trying to put distance between themselves and the lingering effects of the coronavirus pandemic. Growth stocks have been particularly hard hit.
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Where the broad market S&P 500 index is down 17% year to date, the Vanguard Growth Index Fund has tumbled 28% so far this year. Some of 2021’s top performing stocks, like Bath & Body Works and Ford, are doing even worse, plunging 45% and 38%, respectively.
Although there’s still a long slog ahead for many businesses as consumers reel from the souring economy, not all stocks will have as difficult a time. In fact, even though Amazon.com (AMZN 3.15%) has also lost 35% of its value so far this year, there’s good reason to believe it will thrive, which is why it’s my top growth stock to buy now.
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Rough start to the new year
That may sound incongruous since Amazon was taken down over fears of slowing growth. First-quarter retail sales fell almost 2% to $56.5 billion, while operating income decreased to $3.7 billion, a 58% drop. That resulted in a net loss of $3.8 billion, or $7.56 per share.
Those kinds of headline numbers, though, miss the larger picture. First, most of Amazon’s losses were the result of its investment in electric truck maker Rivian, which has suffered a greater-than 65% deterioration in value from its initial public offering (IPO) last year. Also, international e-commerce sales fell 6% from the year-ago period.
Although these losses are significant, Amazon’s U.S. retail sales, which represent about 60% of total revenue, still enjoyed a 7.5% gain. Amazon Web Services (AWS), its cloud-computing business, saw revenue surge 37% from last year to $18.4 billion, while operating profits rocketed even higher, jumping 57% to $6.5 billion.
These numbers show that while Amazon is not completely immune from the broader economic forces affecting the retail industry, its operations remain otherwise solid.
Confronting rising costs
Amazon has taken a number of initiatives to bolster its business, such as raising the price of its Prime member loyalty program from $119 to $139 per year and imposing a 5% fuel surcharge for independent sellers on its site. Fulfillment costs jumped 23% year over year to more than $20 billion, though that came as the e-commerce giant doubled the size of its fulfillment network in 24 months.
Even so, it says it now has excess capacity. Although contributing to $2 billion in additional costs compared to last year, it gives the company the ability to grow its business into the capacity it now enjoys.
Moreover, Amazon’s CFO Brian Olsavsky told analysts the retailer was “not seeing softness” in consumer demand even as it keeps an eye on inflation’s impact on consumer budgets.
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Head in the cloud
Of course, more important is Amazon’s cloud business, which has long been the profit center of its operations. As businesses continue to migrate their operations and data to the cloud, AWS’ growth should continue to be at the white-hot rate it has become accustomed to, even as more competitors enter the space.
“We’re really still near the beginning of the overall shift to the cloud,” Adam Selipsky, Amazon’s CEO of AWS told the Financial Times earlier this year. Only about 5% to 15% of companies have moved their IT workloads from in-house data centers to cloud infrastructure networks.
He expects almost all will eventually make the transition to the cloud, whether to Amazon, Microsoft‘s Azure, or Alphabet‘s Google Cloud.
Time to act
Amazon is also preparing to split its stock 20-to-1. At current prices, this will put the shares at around $110 each, a much more affordable price to attract retail investors. Even though a split doesn’t change anything about the fundamentals of a company, it is still viewed as a bullish sign by the market.
Wall Street expects Amazon to grow earnings at 40% annually for the next five years, and with the stock down 45% from its all-time high, it looks like a great time to pick up this top growth stock.
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