Amazon (NASDAQ:AMZN) delivered a robust set of Q1 earnings last month but stumbled at the familiar hurdle: Despite strong sales and operating profits benefiting from cost-cutting efforts, the cloudy outlook presented by the company left investors jittery about the future.
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Since reporting earnings, Needham analyst Laura Martin has noted conversations with investors that have presented both bull and bear arguments for Amazon. So, what do these consist of?
Well, first off, the bulls can point to Amazon being an industry leader in ecommerce, retail media and Cloud. “Owing to winner-take-most digital economics,” says Martin, “these strong market positions suggest above industry rev growth and margin upside.”
Talking of margins, on a structural basis, as its high margin businesses (ads and Cloud) expand, so does the profit profile. For example, in 1Q23, the company generated op margins of 3.7%, a big sequential 190 basis point improvement from 4Q22’s 1.8% and amounting to the highest op margin since 3Q21. Lower shipping costs and improving key productivity can be attributed to the structural cost improvements. The bulls believe margins are also benefiting from growing advertising revenue. In the quarter, ad rev growth rose by 23% year-over-year, “well ahead” of peers.
On the other hand, the bears have their own arguments. Among these is the competition among Big Tech for ‘generative AI ascendancy,’ as investors believe that having best-in-class generative AI is essential to compete in the cloud industry. Currently, Microsoft holds the clear leadership position due to its investment in ChatGPT. As Amazon attempts to rein in its rivals, the significant unknowns revolve around costs, CapEx, and the return on invested capital (ROIC) of its spending.
“Most investors believe that AMZN’s valuation is at risk if its costs or CapX in 2023 rises,” notes Martin, “even if this spending is attributable to generative AI, because returns are unclear.”
There are also the fears around the slowdown in Amazon’s AWS segment. For example, AWS’s 2Q23 guide implies a 500 basis point sequential deceleration to levels “well below key Cloud competitors.”
Moreover, AWS delivered weak margins in 1Q23, and as the revenue growth guidance further decelerates, the majority anticipates margins will drop some more, too. “Also,” adds Martin, “not knowing when trough AWS revs may occur is a worry for some investors.”
So, where does Martin stand on the matter? Ultimately, with the bulls, it seems. The analyst maintained a Buy rating, backed by a $120 price target.(To watch Martin’s track record, click here)
The Needham view may turn out to be the conservative look at AMZN – the stock’s Strong Buy consensus rating is based on 35 Buys and a single Hold, and the average price target of $134.24 suggests ~17% upside from the current share price of $114. (See Amazon stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
