AMZN Stock Forecast: Long-Term Upside Potential In Macro Storm

“Despite continued inflationary pressures in fuel, energy, and transportation costs, we’re making progress on the more controllable costs we referenced last quarter, particularly improving the productivity of our fulfillment network. We’re also seeing revenue accelerate as we continue to make Prime even better for members, both investing in faster shipping speeds, and adding unique.” – Andy Jassy, Amazon CEO
 

(Source: commons.wikimedia.org)

Overview

Amazon.com, Inc. (NASDAQ: AMZN), as the world’s largest and leading portal for e-Commerce was founded in 1994, and went public in 1997. Amazon’s business is divided into online stores, offline stores, third-party services, subscription services, AWS (Amazon Web Services), and others (primarily advertising). North America and International are the core retail business, while Amazon Web Services and digital advertising businesses are growing rapidly and are well-established components that have a positive influence on Amazon’s profitability metrics over the long haul. The Amazon Web Services segment consists of the global sales of compute, storage, database, and AWS service offerings for start-ups, enterprises, government agencies, and academic institutions. There are a variety of factors that can affect  Amazon’s stock price, including the rate of revenue growth, profitability, AWS segment growth, and any stock splits that may occur.

Amazon Is in the Doldrums with Inflation Challenge

Amazon has had a couple of tough quarters so far, and various elements have been weighing on its business. For example, e-commerce business was affected by high inflation, the fading tailwinds from the surge in e-commerce demand, the supply chain challenge, and the pressure of increasing interest rates on growth stocks.

Specifically, persistently high inflation is a major challenge for large retailers which rely on consumers’ willingness to spend money online. The Bureau of Labor Statistics recently released inflation data for August. The CPI rose by 0.1% from 8.3% in the same period last year. Inflation has led to lower real income for consumers and pessimistic market expectations have led to lower consumer confidence and relatively lower spending. Rising costs are a serious obstacle to the growth of consumer spending. Higher inflation has increased Amazon’s transport and logistics costs. Also, after the epidemic, the consumption structure of users will change: from goods consumption to service consumption. Finally, Amazon’s own growth added to the challenges and Amazon found itself with excess capacity.

*Source: Bureau of Labor Statistics
(Figure 1- YoY Percentage Change in the Consumer Price Index)

All of these elements together have weighed on the stock price. The stock is trading down about 37% from its all-time high and the average price for the last 52 weeks is $146.30.  It’s also more affordable for investors to buy at the moment because a single share costs just $114 thanks to the company’s recent 20-for-1 stock split, which shrank it down from a price of $2,447.

*Source: finance.yahoo.com
(Figure 2- AMZN Stock Price Performance)

But I believe that AMZN might be on the cusp of a turnaround. The stock skyrocketed in 2020 and 2021 as e-commerce boomed during the pandemic, with consumers flocking to online retailers for everything. It likely formed its bottom price which was before COVID and is unlikely to breach that support level. This recent pullback from its August highs represents an opportunity for investors to consider adding Amazon to their portfolios because the current Amazon price is fairly close to what it was before COVID started. At the same time, the company is on track to improve its growth profile and recover its profitability.


Key Indicators Against Macro Headwinds

In the midst of extreme macro-related earnings volatility across tech, AMZN provided investors with very clean second-quarter earnings.  Amazon reported revenue of $121.2 billion in the second quarter total compared with $113.1 billion in the second quarter of 2021, representing a growth of 7.2% year over year, at the top end of guidance.

*Source: Amazon Quarterly Results
(Figure 3- AMZN’s  Retail Segment and Sub-Business Revenue)

Specifically, Amazon’s retail business is showing signs of recovery while its cloud business slowed down in the short term but remained firm. Third-party seller services remained more resilient than first-party, and its revenue growth is back above 10 percent. And 3P seller mix rose to 57% of total units paid, a company record high. Amazon has raised prices on logistics services since April 28, which means a 5% fuel and inflation surcharge on top of the current per-piece Amazon logistics delivery fee, helping to hedge some of the impacts of inflation and fuel the growth of the third-party retail business. As important Amazon management continues to point to the gains that they have made in faster delivery times, driving frequency as a key contributor to the accelerative revenue cadence that is expected in the 2H. Notably, these gains are just starting to move the needle for the millions of Prime subscribers added during the pandemic. Thus in my view, this level of revenue stability looks sustainable as we head into 2023.
 

*Source: Amazon Quarterly Results
(Figure 4- Amazon Percent of Units by Third-Party Sellers)


The subscription business provides Amazon with a steady, recurring revenue base in which it can invest in other high-growth services. This follows Amazon’s price hike on membership fees in the United States. Research firm Consumer Intelligence Research Partners shows that growth of  Amazon’s U.S. membership of 172 million people stagnated in line with six months ago. Amazon’s members are sticky and the price increase did not reduce the number of members, but growth has hit a bottleneck. Recently, Amazon announced a price increase for membership fees in other regions as well. Subscription services have higher margins, and price increases could improve Amazon’s slashed operating profit. The subscription business will be a key driver for Amazon stock and provides a massive halo effect to other products and services launched by the company. Thus in my point of view, this level of revenue stability looks sustainable as we head into 2023.
 

*Source: Bloomberg
(Figure 5- Amazon’s Retail Segment Sub-business Growth)


The advertising business model is displaying meaningful volatility in the face of current macro headwinds. The advertising business realized revenue of $ 8.76 billion in the second quarter, up 21% year-on-year. The slowdown of the growth rate is mainly due to the macroeconomic downturn. The advertising business has a high correlation with the macro market prosperity. The decline in business growth rate is within the expectation, and the advertising business is still optimistic as the driving force of future growth. Also, management commented that there is the progress made with rolling out a wider range of ad products. Meanwhile, compared with META (formerly Facebook), Amazon’s growth rate is stable. META’s advertising revenue in the second quarter was $28.2 billion, a negative growth of 1.5% year on year.
 

*Source: Bloomberg
(Figure 6- Amazon Advertising Services Growth


Amazon’s star business AWS has been a reliable growth engine and continued to lead strong momentum in the quarter with 33% revenue growth year over year to $19.7. The growth rate slowed, but still maintained fast, and exceeded market expectations of 2%. Amazon continued to expand its customers and industries during the reporting period and build on AWS’ leadership position within a public cloud, and its core medium and large enterprise customer base remained solid. New customers signed during the quarter included Delta Airlines, Riot Games, British Telecom, and Jefferies Investment Bank, among others.
 

Amazon Stock Forecast: Estimate Amazon’s Performance

Given the downbeat outlook for the second quarter amid the economic downturn, investors are more concerned about the performance of Amazon in the third quarter. Amazon’s third-quarter guidance gave the market a shot in the arm. For the third quarter of 2022, management guided net sales to grow 13-17% to $125 billion -$130 billion, citing Prime Day (contributed 400bps to 2Q21 revenue growth) and strengthening fulfillment as the main drivers.

Based on Yahoo Finance coverage for AMZN as shown in the figure below, out of 47 analysts: 43 take Strong Buy and Buy positions, 4 take the Hold position and the Underperform position, and none take the Sell position. The analysts’ community puts the average target price for the stock at $170, while it is traded at $113.

*Source: Yahoo Finance
(Figure 7- Yahoo Finance’s Recommendation


As a momo growth stock, Amazon’s EV/EBITDA has been under pressure since this year due to a series of factors such as inflation and the business cycle, and it is still at a historically low level, along with the topping out of inflation data and the continued improvement of the company’s own revenue growth and profitability. I expect that the company’s valuation level has obvious room for repair in the short term.  

As for the financial performance forecast, the revenue growth and operating margins are expected to continue to improve. Based on the above analysis, it is expected that Amazon’s e-commerce business will gradually improve in the second half of the year. Although the rebound will still be affected by macro and other factors, the most difficult moment has basically passed. On the cost side, considering the decrease in the cost of crude oil and shipping, as well as the adjustment of the company’s capital expenditure and operation strategy in warehousing and logistics, the company’s profit margin has also started to enter a channel of improvement.
 

*Source: finbox.com
(Figure 8- AMZN’s EV/EBITDA Ratio)


Stock buybacks are also sending positive signals. Amazon approved a $5 billion buyback authorization in 2016 but did not actually launch a buyback program. Amazon bought back about $1.3 billion worth of shares in January and February 2022, far more than it has ever done in each round of buybacks. In addition, according to CNBC, the company’s stock split in March 2022, and its board has authorized Amazon to buy back up to $10 billion worth of shares, which could help support the company’s stock price.

Based on the STOP model, I will take the target price higher to $140, implying an around 17% upside from current levels. (Sum-of-the-Parts Analysis /SOTP model aims to estimate the value of each business segment within a company separately, which are then added together to arrive at the company’s implied total enterprise value.) Broadly speaking, Amazon’s e-commerce demand has held up relatively well YTD. However, the company is most certainly not immune to recessionary concerns, and as such, I temper my revenue outlook into 2023 given the stickiness of Prime. And with strong product and sales capabilities, AWS has been the most important growth driver for the company so I think that the 22x EBITDA for AWS is justified given the strong industry tailwinds that Amazon is benefiting from its leadership position in the industry, with one of the more robust and sustainable growth profiles amongst its other business divisions.
 

*Source: Author generated
(Figure 9- Amazon SOTP Valuation)


Amazon Stock Forecast: Conclusion

Overall, although the growth of the e-commerce business is slowing down, I believe Amazon’s flexibility in pushing first-party vs. third-party inventory and its Prime offering both serve as important benefits in its retail business, and its multi-year head start in the cloud has resulted in a 40%+ AWS global market share, which means solid AWS is still the key to supporting Amazon’s stock price. Amazon is also starting to show more profit, with its fast-growing AWS and advertising revenue streams. Therefore, I expect sentiment for Amazon to shift more positively and for shares to outperform. Moreover, the recovery of business in North America and the Fed’s attitude toward raising interest rates give us the possibility of a future consumer recovery. So, I reiterate the stock as a strong buy and set the price at $140.


It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the AMZN stock forecast. The light green for the short-term forecasts is mildly bullish, while the darker green is a strong bullish signal for the one-year forecast.


Summary:

  • Key indicators beat expectations in a downward economic environment
  • AWS is a fast-growing, highly profitable business with powerful moats
  • Be bullish on Amazon Ads, AWS, and ultimately its core businesses running at a positive operating margin
  • I recommend Buy and project a target price of $140 on a year-horizon based on the STOP model


Past Success with AMZN Stock Forecast

I Know First has been bullish on the AMZN stock forecast in the past. On June 19th, 2022 the I Know First algorithm issued a forecast for AMZN stock price and recommended AMZN as one of the best stocks to buy. The AI-driven AMZN stock prediction was successful on a 3-months time horizon resulting in more than 17.36%.

 


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Disclosure: This article originally appeared on Iknowfirst.com, a financial services firm that utilizes an advanced ...

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