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Amazon (AMZN 3.89%) isn’t known for its hardware releases the way a company like Apple is, but the e-commerce giant has built an impressive array of devices over the years. Those include its Fire tablets, Fire smart-TV devices, Alexa gadgets, Kindle e-readers, and smart-home devices, like the Ring.
On Wednesday, Amazon hosted what may have been its biggest product-release event ever. It unveiled a new smart TV, a Kindle you can write on called the Scribe, four new Echo devices, an improved Ring camera, and new features for its Astro robot, among other announcements.
The news didn’t seem to have much of an impact on Amazon’s stock price Wednesday. Shares finished up 3.2%, though that seemed to owe more to the broad-market’s gains in response to the Bank of England’s moves to shore up the pound, rather than the product announcement itself.
Still, investors shouldn’t ignore the new product lineup. Even though gadgets aren’t central to Amazon’s business, they still fulfill an important function.
Amazon’s new-product announcement helps it accomplish two goals. First, it primes the consumer-spending pump for its second Prime Day in October and for the holiday season coming shortly after that.
Amazon tends to focus on selling its own products during Prime Day and the holidays, and offers discounts in order to accelerate adoption. Adding new products just ahead of its sales holiday is a clever way to build excitement for the new devices.
But the e-commerce company is interested in more than just sales. Most of the products it sells encourage spending after the purchase and strengthen its consumer ecosystem, which is built around Amazon Prime. A purchase of a Fire Tablet, for example, makes it easier for a consumer to shop on Amazon and watch content on Amazon Prime Video. If someone purchases a Kindle e-reader, they then have to buy e-books from Amazon. Selling Echo devices helps Amazon improve its voice-activation technology and collect data.
Tech hardware companies, such as Apple, get most of their revenue from sales of devices, like the iPhone and iPad. For Amazon, hardware only makes up a fraction of its sales. Most of its revenue comes from e-commerce, selling the wide range of products available on its website. Furthermore, most of the company’s profit comes from its cloud-computing division and third-party marketplace. In fact, most of the company’s e-commerce sales come from third-party sellers, rather than directly from Amazon.
Still, the company has long sought to differentiate itself with its hardware and is the leader in categories like e-readers and voice-activated devices. Amazon’s recent acquisition of iRobot also shows that it continues to see hardware as a growth market, though it’s not clear yet what its strategy is with iRobot.
The wide-ranging product release shows that Amazon’s ambitions in hardware haven’t taken a back seat to its other initiatives, and the new products could give a boost to fourth-quarter revenue, especially with Prime Day 2 and the holiday season right around the corner. However, the best reason to buy Amazon stock isn’t a new smart TV or an updated Ring device. It’s that the stock is trading at a discount, just as the company’s performance is about to improve.
Amazon stock is down 37% from its all-time high, falling with the broad market sell-off on fears of a recession. In addition, the company’s growth has slowed down due to difficult comparisons with results a year ago, especially in e-commerce.
However, the good news is that Amazon’s results should improve in the second half of the year. In its guidance for the third quarter, the company called for revenue growth between 13% and 17%, a significant improvement from 7% growth in Q2.
The fourth quarter, meanwhile, should be its most profitable of the year, as retail sales are seasonally strongest. This will leverage fixed costs in its warehouses, growing its profit margins. Meanwhile, Amazon Web Services, its cloud-computing division, continues to deliver strong results, with revenue rising 33% to $19.7 billion. The operating margin for AWS clocked in at 29%, giving it $5.7 billion in operating income.
In other words, Amazon continues to grow briskly. The company also continues to innovate across multiple business lines. Its e-commerce profitability will improve as it moves past the recent headwinds in the sector, and AWS remains a juggernaut.
In that context, the current discount on Amazon stock looks like a mistake. Investors should take advantage and scoop up shares before its results improve.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Apple, and iRobot. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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