Amazon Stock Price:Â $94.14
Consensus Rating:Â Strong Buy
12-Month Price Target:Â $140.50
Market CAP:Â $960.39 Billion
Amazon Shares-Highlights:
- Amazon posted poor third-quarter statistics and provided a negative outlook for the fourth quarter.
- The corporation faces two major challenges: declining profitability and slowing expansion.
- The consumer experience is deteriorating as the number of advertisements on the website increases.
- AWS continues to be the crown jewel, with excellent profitability and respectable growth.
- Given the slumping fundamentals, we feel the decline in valuation multiples is warranted.
Despite the fact that Amazon (AMZN:NSD) continues to be an impressive company that has generated outstanding returns for its shareholders, there are growing indications that its fundamentals are worsening.
For instance, Amazon posted unsatisfactory third-quarter results and provided weak outlook for the fourth quarter. For the third quarter, the business recorded worldwide net sales of $127.1 billion, an increase of 19% year-over-year, and an operating income of $2.5 billion.
Regarding guidance, net sales for the fourth quarter are anticipated to be between $140.0 billion and $148.0 billion or to increase between 2% and 8% compared to the fourth quarter of 2021.
Given the relatively weak profitability, this amount of growth no longer justifies an inflated price. Significant Amazon stock-based compensation, which increased to $5.6 billion in Q3 from $5.2 billion in the second quarter, further dilutes shareholders.
Not only are the financials declining, but we also believe that the consumer experience is degrading. It appears that everything on Amazon is now an advertisement due to the pervasiveness of advertisements on the site.
In the third quarter, 58% of all paid units were sold by third-party vendors, the largest percentage ever. Unfortunately, Amazon has less control over the quality of products sold by third parties compared to those sold directly by the corporation.
With many search results yielding “Sponsored” products, it is becoming increasingly difficult for users to determine whether they are being displayed a product because it is a good alternative or because a third-party vendor has purchased an advertisement.
Sellers, who must now pay considerable sums to advertise on Amazon, are increasing prices to offset the rising cost of doing business, so diminishing the customer experience and rendering Amazon a less competitive shopping location.
Amazon Stock Price-Fundamentals:
Free Cash Flows:
Amazon has historically prioritized free cash flow production, but it went negative last year and will likely do so again this year.
In the past two years, the corporation has doubled the size of its network, largely due to capital expenditures. Thankfully, the corporation is becoming more prudent with its capital expenditures.
Operating Revenue:
The operating margin has declined significantly over the past few quarters. In actuality, it is currently below the company’s ten-year average, thereby wiping out the operating leverage gains the company had gained in previous years.
Operating income has declined dramatically. In Q3 2021, the trailing twelve-month operational income was $28 billion, down 54% year-over-year to less than $13 billion. It is impossible to explain a valuation of one trillion dollars with $13 billion in operating profits.
Net Income:
In addition to the increase in Prime Video content and marketing expenses, the business cited these as reasons affecting profitability. The global debut of Rings of Power and the launch of the NFL Thursday Night Football package in the United States are clear examples.
Important headwinds include inflation, excessive capital expenditures, supply chain challenges, and certainly the most significant factor is demand that is weaker than anticipated. The end result was a trailing twelve-month net income of somewhat more than $11 billion.
Growth:
Amazon’s revenue graph is remarkable, but growth is beginning to decline. Comparatively, Amazon’s revenue is approaching Walmart’s (WMT) trailing twelve-month revenue of $600 billion.
Once firms reach this size, it becomes extremely difficult to sustain significant growth rates.
With the reopening of the economy, Amazon stock price growth pace decreased dramatically. Amazon, therefore, faces two major issues: falling profitability and a slowing growth pace.
Balance Sheet:
Amazon has ample money, but a substantial amount of long-term debt. Given the company’s present negative free cash flow, investors should keep a careful eye on the balance sheet, as it could rapidly deteriorate.
The company’s leverage is acceptable at 1x financial debt to EBITDA, but we would feel much more comfortable if it had a strong net cash position. Cash and short-term investments have decreased recently, but long-term debt has increased.
Valuation:
At first glance, the valuation appears favorable, with valuation multiples such as EV/Revenues well below the ten-year average. However, we would advise caution, as fundamentals are weakening, and we do not anticipate the next ten years will produce growth comparable to Amazon’s prior decade.
The EV/EBITDA ratio is also substantially below the 10-year norm and does not appear to be excessively pricey. Profitability is currently declining, and growth is decelerating, which is an issue. Considering this, an 18x multiple no longer seems so inexpensive.
AWS Remains the Winner:
The reason we are not more pessimistic about Amazon stock price is that its AWS division continues to provide good results, despite growth slowing considerably.
Third-quarter AWS net sales climbed by 27% year-over-year to $20.5 billion, indicating a yearly sales run rate of $82 billion. Amazon said that, as a result of macroeconomic unpredictability, AWS customers have become more cost-conscious.
Therefore, AWS has been working with clients to reduce their bills. The business claims that Graviton3 processors provide 40% better pricing performance than equivalent x86-based instances. This indicates that AWS will gradually displace chips from companies such as Intel (INTC:NSD) and NVIDIA (NVDA:NSD).
AWS is also challenged by rising energy expenses, which compels the company to search for ways to optimize its operations to utilize less energy. In spite of this, the company’s operating profit for the third quarter of 2022 was $5.42 billion.
Amazon Stock Price-Risks:
The fundamentals of Amazon are deteriorating, which is arguably the biggest danger for investors. It remains to be seen whether the corporation will reverse the deteriorating trend in profitability and reignite rapid sales growth.
It is becoming evident that the company overinvested in capital expenditures, and it is now battling to increase its operating margins. Some of its top competitors are gaining a great deal of e-commerce expertise, further complicating the situation. This category covers Walmart (WMT:NYE) and Costco (COST:NSD).
Takeaway:
There are numerous indications that Amazon’s fundamentals are weakening, and diminishing profitability and decelerating growth reflect this.
Given the increase of adverts on the website, we would claim that the customer experience has also declined.
Despite the fact that the value appears attractive relative to historical multiples, we would be cautious given the evident indications of deteriorating fundamentals. AWS’s continued solid performance is the primary reason we are not more pessimistic about the firm.
