Amazon (AMZN) is a company that requires no introduction. A behemoth in the e-commerce and cloud computing industry, Amazon also offers digital streaming and AI solutions. However, Amazon’s performance of late is indeed raising some eyebrows.
I remain bullish on Amazon stock, and see this company as a winner in the long-term race for e-commerce supremacy. Let’s dive into what’s been driving the price action with this behemoth of late. (See Analysts’ Top Stocks on TipRanks)
Lacklustre Q3
Amazon’s stock chart over the long-term is impressive. However, this company certainly hasn’t proved to be volatility-free over the years.
Amazon’s valuation has remained higher than most of its large-cap peers for some time. The company’s growth trajectory has allowed for this valuation gap.
Earnings reports tend to provide volatility for most stocks. However, companies like Amazon can see more volatility during earnings season than other stocks. Such was the case this past quarter.
Late last month, Amazon reported earnings that didn’t give investors the jolt they hoped for. To be fair, AMZN stock rallied into earnings. Accordingly, a significant amount of exuberance was priced into this report.
Net earnings came in at $6.2 billion for the quarter, which was actually a drop from last year’s $6.3 billion tally. Given that 2020 was a pandemic year, that’s a pretty high baseline to go off of. However, any sort of drop in profitability is likely to be viewed negatively, particularly for a company of Amazon’s ilk.
These results also suggested to investors that fears that the economic reopening may hinder earnings are real. How many quarters this weakness persists remains to be seen. It should be noted that the company did report revenue growth of 15%. However, this growth rate was down from the 16% rate reported last year.
Shortages in labor supply, tightness in the global supply chain, and rising costs across the board could impact margins over the near term. The market appears to be pricing in this risk.
However, long-term investors quickly snapped up AMZN shares over the past month, bringing this stock to within 10% of its all-time high. Amazon isn’t a stock that’s likely to remain depressed for long. At least, that’s what the market appears to be telling us.
AWS Shines
One of the key bright spots in an earnings report that most have called lackluster, was Amazon Web Services (AWS). AWS accounts for the e-commerce behemoth’s fast-growing Cloud segment.
This segment brought in Q3 revenues of more than $16 billion. That was good for a 39% year-over-year increase, and a 29% quarter-over-quarter rise.
Operating margins in this segment came in at around 30%. For Amazon, that’s high. Investors looking for a profit driver in the quarters to come are increasingly looking at AWS to make up the difference from margin contraction resulting from supply chain issues.
AWS is Amazon’s golden child right now. This is the segment true long-term investors will want to keep an eye on, as Amazon navigates its way through a difficult competitive environment.
Retention Policies, Staff Recruiting
With multiple headwinds, as discussed earlier, Amazon’s tactical move to combat these forces is indeed laudable. The company is making heavy investments in its staff recruiting, through expensive retention policies like free college tuition fees, increased salaries, etc., for its employees.
These moves have affected Amazon’s Q3 earnings. Some investors may not like any company paying its workers more. However, there’s a strong argument to be made that Amazon is investing in its human infrastructure to be able to continuously grow.
According to a number of experts on this matter, these steps will be essential to maintain a positive customer experience and manage shopper expectations. Arguably, these strategic investments will ultimately help Amazon grow its manpower along with its morale.
New VTR Policy
Recently, Amazon sent a notice to third-party merchants that they need to maintain a VTR (valid tracking rate) for at least 95% of their products. Inability to do can result in getting delisted from the platform. On the company’s webpage, it was reported this was only applicable to merchants in China. However, several businesses in Canada were affected as well.
This mass suspension wiped out a significant proportion of AMZN’s sales. Further, many customers also refused to buy from merchants as the shipping charges were higher.
These negative catalysts appear to be priced in, and Amazon is working on ways of resolving this issue. Over the longer term, it’s more likely that Amazon will find a way to lead the way in product tracking, while also investing in its suppliers to make this happen. However, the headlines certainly haven’t been good for Amazon lately.
What’s Next?
Amazon is lining up to open its department stores, indicating its expansion into the brick-and-mortar category. The stores will come with a high-tech dressing rooms, assisted with touchscreens. Customers will have access to over 100 private-label offerings at the touch of their fingerprints.
The e-commerce giant is also expanding its grocery service business, growing the number of its locations rapidly to bolster both online and offline sales. This will also help Amazon to mitigate supply chain issues – a major factor in increasing prices.
In the next 12 months, Amazon is looking to rake in around $150 million in Economic Operating Cash Flow (EBITDAR). The company the hopes to boost its investments in technology and infrastructure, along with making strategic acquisitions and expanding its retail stores in the coming years.
Wall Street’s Take
As per TipRanks’ analyst rating consensus, AMZN stock is a Strong Buy. Out of 31 analyst ratings, there are 31 Buy recommendations.
The stock has a median price target of $4,095. Amazon’s price targets range from a high of $4,500 to a low of $3,800 per share.
Bottom Line
Amazon’s Q4 guidance does not seemingly provide much in the way for investors to be bullish on this stock. However, taking the longer-term view of Amazon, it’s hard to argue against this company’s growth prospects.
As we head into what could be a blockbuster holiday shopping season, all eyes will be on how this e-commerce juggernaut performs this quarter.
Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article.
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