What’s wrong with Amazon (AMZN)? That has been the main question over the past several months as the stock has gotten punished, falling some 15% in six months, compared to the 3% decline for the S&P 500 index. Amazon shares are already down more than 11% year to date, including 8% just in the past thirty days alone. But has that been an overreaction?
That is one of the key question as the company prepares to report its first quarter fiscal 2022 earnings results after the closing bell Thursday. Shares of the e-commerce giant has languished since reaching all-time highs amid a spectacular rally from the pandemic bottom. The market is re-assessing tech valuations and Amazon has seemingly gotten caught in the middle. But with the stock now trading more than 20% below its 52-week high of $377, it’s hard to ignore Amazon’s relative value.
According to Citigroup analyst Ronald Josey, who has Buy rating on the stock with a $4,100 price target, “Amazon should benefit from improved operational efficiencies at its new Fulfillment Centers, the closing of some of its physical retail locations, and the lapping of COVID-related labor shortages.” In addition to the AWS and Amazon Advertising which he sees as being in strong growth phases, the analyst expects Amazon’s margins to continue to expand over the next few years commensurate with revenue growth. The question is, whether these trends can show enough early strength to revive the stock.
In the three months that ended March, the Seattle-based company is expected to earn earn $8.13 per share on revenue of $116.29 billion. This compares to the year-ago quarter when earnings came to $15.79 per share on revenue of $104.46 billion. For the full year, ending in December, earnings are expected to decline 28% year over year to $48 per share, while full year revenue of $539.22 billion would rise 14.8% year over year.
While Amazon is well-diversified business, the company has also suffered due to slowing revenue growth. The company has had to navigate multiple headwinds impacting e-commerce business over the past year. Aside from rising costs, and higher inflation, the company has had to deal with labor shortages. And the Russia-Ukraine conflict is poised to add additional pressure on near-term profitability not only for the just-ended quarter, but also for the rest of the year. The projected 28% decline in fiscal 2022 profits is nothing to discount.
That said, analyst Ronald Josey remains optimistic about the company’s ability to emerge from these headwinds. "And while we acknowledge higher operating costs are likely to impact margins in the shorter-term given the rising cost of transportation, we believe Amazon should benefit from improved operational efficiencies at its new Fulfillment Centers, the closing of some of its physical retail locations, and the lapping of COVID-related labor shortages.”
Until then, the company’s core business will be in focus. In the fourth quarter, Amazon not only smashed operating income and EPS expectations, it also announced a price increase for Prime membership to $139. The price hike will go into effect on March 25. Q4 total revenue rose 9% to $137.4 billion, beating estimates of $136.5 billion. Of that total, AWS revenue came in at $17.78 billion, above consensus of $17.23 billion. Notably, AWS growth reaccelerated to 40% year-over-year (and now a $71 billion revenue run rate).
Just as impressive, net income grew to $14.3 billion, or $27.75 per share. But for the stock price to rebound, on Thursday the market will want to see whether Amazon’s growth trends can be sustained in the next several quarters.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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