Amazon | Fundamental Analysis

22 de dez. de 2022

Amazon is crawling into 2023, and it definitely, like many others, can't wait to turn over a new chapter.

The tech titan is on the way to one of the slowest growth rates in its history. In the first three quarters of this year, the company lost nearly $8 billion in its e-commerce-focused businesses and announced the first major layoffs in the company's history, including 10,000 corporate personnel. Among the units targeted is Alexa, as Amazon is reportedly losing $10 billion a year on this voice-activation technology.

In other words, Amazon is in a strange defensive position after years of capturing market share in industries as diverse as e-commerce, books, cloud computing, streaming video, and digital advertising.

The good news for investors is that these unfavorable factors are probably already factored into the stock price. Amazon stock is down 50% from its peak last year, creating a potential buying opportunity.

Despite the uncertain macroeconomic environment in 2023, there are some grounds to anticipate Amazon's performance to improve.

For starters, it will be much easier for the company to match its performance in 2023. For the first three quarters of this year, revenue grew only 9.7%, and that growth is expected to slow in Q4 when the company forecasts growth of only 2%-8%.

The strengthening dollar has also impacted results this year, but these negative factors should ease next year as the dollar begins to cool after peaking in September.

In addition, the tech titan is likely to see some margin improvement. CEO Andy Jassy is concentrated on reducing or eliminating inefficient projects. In addition to cutting losses at Alexa, Amazon is also closing such ventures as Amazon Care, a telemedicine and personal health care pilot program, Scout, a home delivery robot, and Fabric.com, an e-commerce site for sewing supplies.

The company has also closed or withdrawn projects to build dozens of warehouses, a sign that it overestimated its e-commerce growth trajectory during the pandemic.

Amazon has a number of highly profitable businesses, including Amazon Web Services (AWS), advertising, and its third-party marketplace, which allows the company to receive commissions and fulfillment fees from the thousands of sellers who trade on its site.

Nevertheless, the company's financial performance indicates that it still has a lot of unsustainable spending. For example, Amazon loses money in its international segment almost every year, suggesting that the company may be overextended in emerging and small markets overseas. Similarly, there is a strong argument that the company is spending too much on Prime Video. This year, the company will devote more than $15 billion to streaming -- more than even Netflix -- and Amazon isn't even monetizing that spending directly, using it to boost Prime's enrollment.

Given the company's countless experiments, there are probably plenty of other unfruitful projects in need of cuts.

Looking at the company's cost-cutting and the strength of its high-margin businesses such as AWS, advertising, and marketplace, it's clear that Amazon could be much more profitable than it is today.

Jassy seems to realize the need to improve profitability as it will become increasingly difficult to maintain high revenue growth, given that total revenue is expected to exceed $500 billion this year.

With the stock down 50% and a market capitalization of less than $1 trillion, the stock looks cheap. AWS alone will have $23 billion in operating income this year, which means Amazon stock is valued at about 40 times that amount.

The rebound in business next year will be dependent on macroeconomic conditions, but at the current stock price, the worst already seems to be priced in. Owning Amazon stock in 2023 could give you an easy doubling over the next year or two, and your losses will likely be limited unless the country enters a deep recession.