Last year was a disappointing year Amazon (AMZN 5.81%) When Tesla (TSLA 3.68%) Shareholder. Both stocks are down more than 45% in 2022 as the 2020-2021 market bubble deflates. Investors are concerned about Amazon’s current lack of profitability and a potential slowdown in e-commerce sales, while Tesla investors are concerned about intensifying electric vehicle (EV) competition and Elon Musk’s is concerned about its acquisition of Twitter.
Amazon and Tesla returns both dropped significantly in 2022, but I expect that to change in 2023. Here are three reasons why Amazon returns will surpass Tesla returns in 2023.
1. Amazon’s prospects are bright
Amazon is a huge technology giant, and many know it for its flagship e-commerce business. But now its most important segment is Amazon Web Services (AWS), the world’s leading cloud computing infrastructure provider. In the last 12 months, AWS generated $76.5 billion in revenue and $23 billion in operating profit, and holds an estimated 32% share of the cloud computing market.
AWS is growing rapidly at this massive scale (34% year-over-year growth in the last 12 months). But there are no signs that this will slow down anytime soon. An executive last quarter told investors he had a $104 billion backlog in subsidiaries, up 57% from a year earlier. There are still many companies switching their IT infrastructure to the cloud, and many of them choose AWS to meet their needs.
Tesla’s most important business line is the sale of electric vehicles. With that in mind, recent trends in backlog should worry investors. According to third-party analysts, Tesla’s backlog has shrunk from 476,000 units in July to just 190,000 units at the end of November. For a company looking to ramp up production capacity and become a leader in the transition to EVs, this doesn’t bode well for his 2023 growth.
2. Reversal of profit margins?
Just by looking at the price/earnings ratio (P/E) of Amazon and Tesla, you’d think it would be a good idea to buy Tesla stock. But investing is not about the past, it’s about what happens in the future. And I think Amazon’s future profit potential is bright. First, in the e-commerce sector (the biggest margin headwind), Amazon increased its high-margin advertising revenue by 30% year-over-year. Second, management announced it would lay off 18,000 employees after overhiring in 2021 and early 2022. This should save billions of dollars annually. His AWS operating margin, which is the bulk of this business every year, is over 25%.
Conversely, there are signs that Tesla’s profit margins will shrink in 2023. The company has been cutting prices in North America and China in recent months, and will feel the impact of rising prices for its inputs such as copper and lithium. Rising input costs and falling selling prices will hurt your profit margins, no matter how strong your brand is.
3. Amazon’s structural advantage
Finally, there is one important reason Amazon is poised to beat Tesla. It’s a structural competitive advantage. Amazon has invested tens of billions of dollars in fulfillment, logistics, and shipping infrastructure, and no other company in North America can match it. The cloud has economies of scale and can offer lower prices than other cloud providers.
Tesla, on the other hand, operates in a highly competitive EV market and has no differentiation beyond its brand. Many automakers have larger capital bases than Tesla and are currently ramping up EV production. After 2023, this will create new challenges for Tesla. Tesla is trying to differentiate itself from its competitors. It’s a challenge he didn’t have to face in the past five years when he was the only EV maker of his size outside of China.
Add all these factors together and I think it’s clear why Amazon outperforms Tesla in the 2023 portfolio.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brett Schafer has no positions in any of the mentioned stocks. The Motley Fool recommends Amazon.com and Tesla. The Motley Fool’s U.S. headquarters has a disclosure policy.