Amazon (AMZN) is a business that does not need to be introduced. A giant in the e-commerce and cloud computing industry, Amazon also offers digital streaming and AI solutions. However, Amazon’s performance lately does raise some eyebrows.
I remain bullish on the Amazon stock and see this company as a winner in the long-term race for e-commerce supremacy. Let’s dive into what has been driving price action with this juggernaut lately. (See the top analyst stocks on TipRanks)
Amazon’s long-term stock chart is impressive. However, this company has certainly not proven to be free from volatility over the years.
Amazon’s valuation has remained above most of its large-cap peers for some time. The company’s growth trajectory has enabled this valuation gap.
Earnings reports tend to provide volatility for most stocks. However, companies like Amazon may see more volatility during earnings season than other stocks. This was the case during the last quarter.
At the end of last month, Amazon reported earnings that didn’t give investors the shock they were hoping for. To be fair, AMZN stock rallied in earnings. As a result, a significant amount of exuberance has been incorporated into this report.
Net income was $ 6.2 billion for the quarter, which is actually down from $ 6.3 billion last year. Given that 2020 was a pandemic year, that’s a pretty high baseline to go. However, any sort of drop in profitability is likely to be viewed negatively, especially for a company of the Amazon species.
These results also suggested to investors that fears that the economic reopening could hamper profits are real. It remains to be seen for how many quarters this weakness persists. It should be noted that the company recorded a revenue growth of 15%. However, this growth rate was lower than the 16% rate recorded last year.
Labor shortages, the narrowness of the global supply chain and rising costs across the board could impact margins in the near term. The market seems to take this risk into account.
However, long-term investors quickly took hold of AMZN shares over the past month, bringing that share to less than 10% of its all-time high. Amazon is not a stock that should stay depressed for long. At least that’s what the market seems to tell us.
One of the main bright spots in an earnings report that most called lackluster was Amazon Web Services (AWS). AWS represents the rapidly growing cloud segment of the e-commerce giant.
This segment generated revenues of over $ 16 billion in the third quarter. It was good for a 39% year-over-year increase and a 29% quarter-over-quarter increase.
The operating margins for this segment are around 30%. For Amazon, it’s high. Investors looking for a profit engine in the coming quarters will increasingly look to AWS to offset shrinking margins resulting from supply chain issues.
AWS is Amazon’s golden child right now. This is the segment that true long-term investors will want to keep an eye on, as Amazon struggles through a tough competitive environment.
Retention policies, staff recruitment
With multiple headwinds, as noted earlier, Amazon’s tactical approach to tackling these forces is indeed laudable. The company invests heavily in recruiting its staff, through costly retention policies such as free tuition, increased salaries, etc., for its employees.
These moves affected Amazon earnings in the third quarter. Some investors may not like when a company pays its workers more. However, there is a strong case to be made that Amazon is investing in its human infrastructure so that it can continuously grow.
According to several experts in the field, these steps will be essential to maintain a positive customer experience and manage the expectations of buyers. Arguably, these strategic investments will ultimately help Amazon grow its workforce and morale.
New VTR policy
Recently, Amazon sent a notice to third-party merchants asking them to maintain a VTR (Valid Tracking Rate) for at least 95% of their products. Failure to do so may result in rig delisting. On the company’s webpage, it was reported that this only applies to traders in China. However, several businesses in Canada have also been affected.
This mass suspension wiped out a significant portion of AMZN’s sales. In addition, many customers also refused to buy from traders because the shipping cost was higher.
These negative catalysts seem to be taken care of and Amazon is working on ways to address this issue. 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 it happen. However, the headlines certainly haven’t been good for Amazon lately.
Amazon is lining up to open its department stores, indicating its expansion into the brick-and-mortar category. The stores will be equipped with high-tech cloakrooms, assisted by touch screens. 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 services business, rapidly increasing the number of its locations to bolster online and offline sales. It will also help Amazon alleviate supply chain issues, a major factor driving prices up.
Over the next 12 months, Amazon is looking to rake in around $ 150 million in economic operating cash flow (EBITDAR). The company hopes to increase its investments in technology and infrastructure, as well as make strategic acquisitions and expand its retail stores in the coming years.
The Taking of Wall Street
According to the TipRanks analyst rating consensus, AMZN stock is a strong buy. Out of 31 analyst notes, 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.
Amazon’s forecast for the fourth quarter apparently does not give investors any optimism on the stock. However, looking at Amazon in the longer term, it is difficult to dispute the growth prospects of this business.
As we head into what could be a successful holiday shopping season, all eyes will be on how this e-commerce juggernaut performs this quarter.
Disclosure: At the time of publication, Chris MacDonald does not have a position in any of the titles mentioned in this article.
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