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The second quarter earnings season is in full swing and next week tech giants like Amazon (AMZN), Alphabet (GOOG), Microsoft (MSFT), and Meta Platforms (META) will release their earnings reports.
Tech stocks have rebounded in 2023 and technology is the best-performing sector in the S&P 500 (SPY). The sector’s fortunes have made nothing short of a U-turn, as it was the worst-performing sector in 2022. Incidentally, the tech-heavy Nasdaq index (QQQ) fell in all four quarters last year – for the first time since the dot com bubble burst more than two decades ago.
Amazon lost around half of its market cap in 2022 and underperformed the markets. However, AMZN’s underperformance actually began in 2021 when it gained a mere 2.4% while the S&P 500 gained almost 27%.
AMZN stock fell in 2022 amid the tech crash
Amid the tech crash of 2022, Amazon became the first company ever to lose over $1 trillion in its market cap. At its peak in July 2021, Amazon’s market cap was almost $1.9 trillion and the stage looked set for the company to join the coveted $2 trillion market cap club, with like Apple (AAPL) and Microsoft.
However, due to the massive tech sell-off, in December of 2022, Amazon briefly fell out from the $1 trillion dollar club. So too did Meta Platforms and Tesla (TSLA). That said, both Meta and Tesla have more than doubled in 2023 and META is the second-best-performing S&P 500 stock this year.
Amazon has rallied impressively in 2023, and now has a market cap around $1.3 trillion. Notably, in the FAANG group, only Apple has hit new highs in 2023 and all the other constituents are still considerably below their all-time highs, despite the recent rally.
What’s going on with Amazon stock?
Amazon’s sales increased 9% in 2022 which is the lowest since it went public. Amazon Web Services (AWS) revenues rose 29% which again was the lowest since the company started to report the segment’s revenues separately.
AWS revenue growth has been falling for the last few quarters and fell further to a new all-time low of 16% in the first quarter of 2023.
The management’s commentary on the business failed to instill confidence and during the Q1 2023 earnings call, it said that AWS revenue growth in April was around 11%. Blaming the “ongoing economic uncertainty,” Amazon’s CFO Brian Olsavsky said, “customers continue to evaluate ways to optimize their cloud spending in response to these tough economic conditions in the first quarter.”
It is not that only Amazon's topline growth has sagged and its operating income fell over 50% to $12.9 billion in 2022. Only AWS posted an operating profit in 2022 and both the North American and International segments posted an operating loss last year.
Amazon posted negative free cash flows of $11.6 billion in 2022 and $9.1 billion in 2021. Looking at the financials, the crash in Amazon stock appears justified. That said, it is not the end of the road for the company, and I believe AMZN stock can still deliver decent returns in the long term.
Amazon has an enviable ecosystem that is tough to emulate
Amazon has an enviable ecosystem and is present in multiple high-growth industries. It is the largest ecommerce company in the US by a fairly wide margin and similarly leads the cloud infrastructure market with over a third of the market share.
Amazon had over 200 million Prime subscribers per its most recent update. The service is not only a revenue driver for Amazon but is part of the overall ecosystem and helps improve customer stickiness.
The company’s logistics network is another competitive advantage even as competitors like Walmart (WMT) are playing catchup.
One lesser talked about aspect of Amazon’s business is advertising, but the business generated revenues of almost $38 billion in 2022 – up 21% from the previous year. The growth came amid a tough macro environment and Meta Platforms reported its first annual revenue decline last year.
Things are no different for Alphabet and YouTube and Google search revenues have fallen YoY for the last two and three quarters respectively.
AMZN stock looks a good buy: Here's why
Meanwhile, I believe there are four reasons why AMZN stock looks like a good buy at these levels.
- Firstly, Amazon has taken several measures to control costs and has fired around 27,000 workers. These measures should help lift its earnings and Wall Street analysts expect the company’s profits to rise 121% in 2023 and 50% in 2024.
- Amazon admitted to overinvesting in capacity on the assumption that its sales would continue to rise at a fast pace as it did during the COVID-19 pandemic. Now as the growth has slowed down, its investment needs would also come down which would mean lower capex and by its extension higher cash flows in the coming years.
- Inflation has come down which would help Amazon lower its expenses. Further, as its capacity utilization improves, its earnings would also receive a boost.
- Finally, from a valuation perspective, Amazon trades at a forward price-to-sales multiple of 2.32x which is below the five-year average of nearly 3x. Its forward PE multiple is 85x which while looks high at first glance, is actually not unreasonable considering the expected growth in earnings. The stock also forms part of Berkshire Hathaway's portfolio whose chairman Warren Buffett is known for his value investing.
AMZN stock forecast: Wall Street analysts are quite bullish
Wall Street is bullish on AMZN stock and analysts rate Amazon’s stock a Strong Buy:
Of the 37 analysts that cover AMZN, 31 rate it a Strong Buy, 5 a Moderate Buy, and 1 a Hold. None of the analysts has a Sell rating on Amazon and its mean target price of $146.68 is 12.8% above current stock prices.
Brokerages like JPMorgan (JPM) and Bank of America (BAC) are bullish on Amazon stock heading into the earnings season and the latter believes that improvement in retail margins and AWS growth would help in expansion of the stock’s multiples.
On the date of publication, Mohit Oberoi had a position in: AMZN , AAPL , META , MSFT , QQQ , SPY . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
