Inflationary pressure (including wage increases and higher transportation costs) and a tight labor market continued to weigh on Amazon’s (NASDAQ:AMZN) profit margin. For context, inflationary pressures, productivity losses, and disruption to its operations led to an increase of over $4 billion in costs in Q4.
Meanwhile, increased investments in growth initiatives, including the expansion of fulfillment capacity, further remained a drag.
Now What?
During the Q4 conference call, Amazon’s CFO Brian Olsavsky stated that these cost challenges would likely persist in Q1, which will negatively impact its profitability. However, Olsavsky sees things improving. Moreover, to mitigate the higher costs, Amazon will increase the price of its Prime membership from $119 a year to $139 a year.
Echoing similar sentiments, Brent Thill of Jefferies expects Amazon’s operating income and margins to improve on the back of “efficiency as CAPEX moderates and U.S. Prime fees increase.”
Amazon invested heavily to double its fulfillment capacity over the past couple of years. However, Olsavsky stated that capex on fulfillment capacity will moderate and “will probably now match growth of our underlying businesses.”
Thill expects this to boost Amazon’s free cash flows and drive operational efficiency as an increased number of Amazon’s fulfillment centers would operate at scale.
It’s also worth noting that Amazon’s high-margin AWS (Amazon Web Services) business is witnessing an acceleration in growth, which is positive. Highlighting the same, Thill stated that Amazon’s Q4 marked the “4th consecutive acceleration in AWS Sales growth and with backlog growth accelerating to 61% (from 48%) and pointing to further momentum for AMZN’s most profitable (and valuable) business.”
The analyst raised his earnings estimates for 2022 and kept a Buy rating on AMZN stock.
Along with Thill, Morgan Stanley analyst Brian Nowak expects Amazon’s profitability to improve in 2022 and get a boost from the Prime price increase.
Wall Street’s Take
Wall Street is bullish about AMZN’s prospects as most of its challenges are temporary and will likely dissipate soon. Further, acceleration in AWS revenue growth is encouraging. Amazon stock has received 32 Buy recommendations for a Strong Buy consensus rating.
Further, AMZN’s stock price forecast on TipRanks shows significant upside potential. The average Amazon price target of $4,192.97 implies 36.8% upside potential to current levels.
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