Nasdaq AMZN Amazon

Britons cancelled over 1 million music subscriptions in the first quarter as a worsening cost of living crisis forced them to make savings, industry data showed on Thursday.

What happened On one of the better days for the stock market in recent times, Amazon (NASDAQ: AMZN) was a standout. On a general resurgence in tech stocks and a very positive new analyst note, the giant online retailer's stock zoomed more than 5% higher on Wednesday, easily toppi

In this podcast, Motley Fool senior analyst Asit Sharma discusses:

E-commerce giant Amazon (AMZN) is a household name for many. People turn to the company for everyday groceries, merchandise, and whatnot. However, it's in the news these days for its 20-for-1 stock split.

The stock split has generated interest among retail investors, allowing them to pick up the stock at a reasonable price. However, the stock split does little to Amazon's rock-solid fundamentals.

Many long-term investors, though, are laser-focused on a company's fundamental strength, and that too has made them apprehensive of late. Tough comps in the post-pandemic world have had a lot to with it, including the tough macro-economic conditions at this time. Nevertheless, we are bullish on AMZN stock.

Distress Surrounding Amazon

Amazon stock plunged soon after the company's first-quarter reports declared a sharp loss on April 29. AMZN blamed high inflation, the pandemic, and the Russian invasion for its frail performance, but is it just the external factors creating hindrances for the company?

Amazon, the e-commerce beast, appeared unbeatable for a long time. The company gave shivers to its competitors as its stock ascended to the four-digit territory. However, recently Amazon has had a rough outing in the stock market, shedding around 14% in late April, the most significant single-day drop since 2006. The drop wasn't a one-time misfortune because the company's stock continued to fall once the quarterly reports were uploaded.

Unfortunately, the company announced the slowest quarterly growth rate since 2001. Amazon's revenue increased 7%, amounting to around $116 billion compared to the 44% growth experienced in the previous year.

The company's growth could be hampered further because it is struggling due to inflation and supply-chain problems, but here's good news – these external issues are transitory. Amazon is constantly working to meet capacity requirements and enhance productivity. This could entail that the stock's future is bright.

Talk of the Town – AMZN Stock Split

Based on history, stock splits have resulted in the outperformance of shares. According to Bank of America (BAC), stock splits have led to 25% increases in share prices, on average, one year following a split. This is mainly because investors perceive the split as a sign of confidence from the management's side.

Surprisingly, this isn't the case with AMZN. The company's shares didn't perform satisfactorily post-split, but you shouldn't only look at shares when thinking about investing in Amazon. The company is a gripping case considering its massive 22% and 57% revenue and net earnings growth (respectively) in 2021.

The stock split might attract investors to the stock, but it will take some time before it gains. After the 1999 stock split, the stock experienced a sustained dip. 

Amazon's cloud computing business, though, seems as compelling as ever. Amazon Web Services (AWS) experienced a 32% increase in sales in the first quarter of 2022, maintaining leadership in the market. Moreover, its ad revenue in the first quarter came in at a whopping $7.9 billion. Many blue-chip companies are allocating hefty advertising budgets to Amazon's advertising channels, resulting in a massive growth runway over the long run.

Wall Street's Take

Turning to Wall Street, AMZN stock maintains a Strong Buy consensus rating. Out of 38 total analyst ratings, there are 36 Buys, one Hold, and one Sell rating.

The average Amazon stock price target is $178.66, implying 66.1% upside potential. Analyst price targets range from a low of $107 per share to a high of $212.50 per share.

The Bottom Line on AMZN Stock

Amazon's stock is currently trading at a price-earnings ratio of around 52. This is the lowest the company has experienced in the last five years because investors have rotated out of growth stocks recently. This could be the reason holding back AMZN at this time, but it has nothing on its long-term bull case.

The company's shares seem attractive based on its revenue, and the cloud computing business will contribute immensely to the value of its shares. Of course, AMZN will not soar overnight, but it might grow in the future.

Experts believe the company's growth will climb, which should also lift the shares. So, AMZN might not be on your radar today, but it could be a steal when looking back years from now.

Disclosure

The Invesco S&P 500— Equal Weight Consumer Discretionary ETF is seeing unusually high volume in afternoon trading Wednesday, with over 280,000 shares traded versus three month average volume of about 42,000. Shares of RCD were up about 1.8% on the day.

To ease the U.S. shortage of baby formula, Nature's One and Holle are poised to ship hundreds of thousands of pounds, if not millions of pounds, of additional formula into stores, company executives told Reuters.

Wall Street's main indexes rose on gains in beaten-down growth and financial stocks on Wednesday even as investors braced for a bigger interest rate hike by the Federal Reserve to tame persistently high inflation.

Apple AAPL has yet added another feather to its long list of achievements via its streaming platform — Apple TV+. The company announced on Tuesday that Apple TV+ has won exclusive rights to broadcast Major League Soccer ("MLS") around the world starting from 2023.

Snowflake SNOW recently announced  expansion of its native Python support to advance programmability in the data cloud. Snowflake has launched Snowpark for Python, which is now available for public preview.

Wall Street's main indexes climbed more than 1% on Wednesday, boosted by gains in beaten-down growth and financial stocks, with investors waiting to see how high the Federal Reserve would raise interest rates at its policy meeting to quell inflation.

Netflix (NASDAQ: NFLX) has had a challenging 2022 so far. The company reported a loss of 200,000 subscribers in its fiscal first quarter, and it expects to drop another 2 million in Q2. This exodus of subscribers comes as the company's stock price has declined. Netflix's shares a

The NASDAQ 100 Pre-Market Indicator is up 99.91 to 11,411.6. The total Pre-Market volume is currently 38,103,262 shares traded.The following are the most active stocks for the pre-market session: Revlon, Inc. (REV) is +0.56 at $2.43, with 6,383,773 shares traded. REV's current l

Costco (NASDAQ: COST) has endured four major U.S. recessions since the company went public in 1985. Yet the warehouse retailer's stock has still generated a total return of about 74,500% since its 1985 IPO, making it one of the greatest stocks of the past four decades.But can it

Amazon (NASDAQ: AMZN) has proven it can reward investors over time. Shares of the retail giant gained more than 800% over the past decade -- and last year they topped $3,000. That's as the company's revenue and profit climbed into the billions of dollars. And key metrics like fre

To ease the U.S. shortage of baby formula, Nature's One and Holle are poised to ship hundreds of thousands of pounds, if not millions of pounds, of additional formula into stores, company executives told Reuters.

Chief executives from Alphabet Inc, Amazon.com Inc and Microsoft Corp on Wednesday called on Congress to pass legislation aimed at boosting U.S. economic competitiveness against China, including in chip manufacturing.

Adobe (NASDAQ: ADBE) is scheduled to report its fiscal Q2 2022 results on Thursday, June 16 (after market close). We expect Adobe to edge past the consensus estimates of revenues and earnings. The technology giant posted better than expected results in the last quarter, wi

Shopify stock (NYSE: SHOP) has had a tough year so far, declining by almost 75% since early January as demand growth for the company’s e-commerce software slows, while investors also rotate out of high-multiple stocks amid rising interest rates. For perspective, over Q1 202

Boasting over 200 million Prime memberships, Amazon (AMZN) needs no introduction. The world's fourth most-valuable company, with a market capitalization of over $1 trillion, is without a doubt on most investors' watchlists.

The company is expected to surpass the $600 billion annual revenues threshold by the end of next year, thus becoming the world's largest company in terms of revenues. The title has been held by Walmart (WMT) for a long time, whose annual revenues average around $570 billion.

With Amazon's global reach expanding at a dramatic rate over the past decade, its stock had been one of the most celebrated in the market up until recently. The company's performance was, in fact, boosted during the COVID-19 pandemic amid increased demand for home deliveries, resulting in Amazon reporting record profits of $33.4 billion last year.

However, the market's sentiment towards the stock has shifted lately, with the currently tough macroeconomic environment threatening the company's growth and profitability prospects. Shares of Amazon have declined by nearly 40% year-to-date, significantly more than its mega-cap peers. The lack of confidence in the stock is also reflected in the absence of revitalized investor interest in it despite its recent 20:1 split.

Stock splits usually ignite confidence in stocks, as they improve liquidity and are overall a net positive for investors' psychology. In the case of Amazon, the stock split also allowed for increased retail investor participation amid the stock's, previously for many, unapproachable price levels.

Yet, shares have declined further since the event, pressured by the market's general sell-off and increased concerns over the company's profitability prospects.

I am neutral on the stock.

Strong Profitability Headwinds

Amazon's Q1 results came in rather weak, while management's soft guidance for Q2 combined with a very volatile macroeconomic environment continued to inflict fear on investors. While net sales increased 7% to $116.4 billion in the first quarter, operating margins declined from 8.2% to 3.2%. Accordingly, Amazon's operating income for the period declined 58.4% to $3.7 billion.

What's really worrying about Amazon's operating income is that it's currently solely supported by AWS. The segment grew 37% year-over-year or 34% annually over the last two years, in the first quarter, as AWS has been critical in supporting companies to weather the pandemic and move more of their workloads into the cloud.

Following economies of scale, AWS's operating margin expanded from 30.8% to 35.3.% for the quarter, contributing to an operating income of $6.5 billion.

However, Amazon's core business, excluding AWS, is now losing money. Specifically, both Amazon's North American and International divisions lost money, reporting operating margins of -2.3% and -4.5%, respectively. Unfortunately, the current headwinds affecting Amazon's core operations do not seem to be a temporary phenomenon.

Management expects the company to post net sales between $116.0 billion and $121.0 billion in Q2, suggesting growth between 3% and 7% compared to Q2 2021. This implies further deceleration on a quarter-over-quarter basis. Further, the operating income (or loss) is expected to be between a loss of $1.0 billion and a gain of $3.0 billion, compared with a gain of $7.7 billion in Q2 2022.

This does not only imply further erosion from Q1's operating income of $3.7 billion, but it also means that the company will almost certainly lose money on a net income basis when we account for all other non-operating expenses (e.g., interest expenses on debt).

In addition, it's quite likely that ongoing headwinds will endure beyond Q2, as the current macroeconomic turmoil should keep persisting in the coming quarters.

Firstly, amid elevated inflation levels, consumers' purchasing power on discretionary goods could decline moving forward, as they have to prioritize spending on necessities such as rent and utilities, whose rates are on the rise. This could result in lower revenues for Amazon, which matches the ongoing slowdown in the company's revenue growth trajectory.

Simultaneously, Amazon should also be suffering from rising costs. Gasoline and diesel prices hover at record highs, which means that shipping goods to customers should be more expensive, at least during the next few quarters. Following further increases in shipping costs compared to the previous quarter, it's only natural to assume that operating margins will come out increasingly disappointing, going forward.

In any case, inflation is set to affect Amazon's bottom line on multiple fronts. Chartering rates for containers to be loaded with goods, for instance, also remain at sky-high levels. Therefore, Amazon's operating income may be maintained at negative levels until these headwinds soften, resulting in continuous pressure on the stock price.

Wall Street's Take

Turning to Wall Street, Amazon has a Strong Buy consensus rating based on 36 Buys, one Hold, and one Sell rating assigned in the past three months. At $178.66, the average Amazon price target implies 74.6% upside potential.

Takeaway

Wall Street's love for Amazon shares has faded out lately, with its latest results, guidance, and future profitability prospects all appearing quite weak. The AWS segment's performance remains robust, but alone, it may not be able to offset the losses from Amazon's core business.

The ongoing macroeconomic turmoil is likely to endure moving forward, making it hard to tell how long it will take for Amazon's profitability prospects to resume to strong levels. Therefore, there may be more room for shares to correct.

After all, the stock is currently trading at 38 times the company's projected Fiscal 2023 net income, which is an expensive multiple in the first place, considering the circumstances.

Disclosure

A report from Jefferies analyst Brent Thill, which was released over the weekend, has made some investors nervous about Amazon (AMZN) stock.

Now before getting to the details, it bears emphasizing: Thill actually likes Amazon stock. Indeed, he recommends buying the stock, and thinks the shares, which cost less than $103 apiece today, are actually worth more like $163 -- and will hit that price within a year.

However, according to Thill, online traffic to the Amazon.com website declined 6% year-over-year in both April and May, which represented "a substantial slowdown" from the 15% web traffic growth Amazon enjoyed back in 2020 for example. And as Thill observes -- unsurprisingly -- there's "a strong historical correlation" between how much web traffic Amazon gets, and how much money gets spent on Amazon.com.

It's not a one-to-one correlation, fortunately, but in Thill's view, these continued 6% declines in web traffic are probably going to work out to no better than flat sales at Amazon in its next quarterly earnings report. This could disappoint investors because, currently, Wall Street consensus estimates have Amazon growing its sales 4% year over year in the year's second quarter.

Granted, it's true that Amazon is not alone in experiencing weakened traffic. As Thill notes, "a return to in person shopping, difficult comps, and a shift in consumption to other discretionary spending buckets (travel/dining) has contributed to declining traffic across the largest ecommerce sites, including Walmart.com and Target.com." In Thill's view, this is evidence that Amazon is not losing market shares to its rivals (i.e. Walmart and Target), but rather just suffering beside them from "shifting consumer behavior."

That will be small comfort to Amazon shareholders, however, if their shares get hit after reporting a sales miss next month. 

Nor are sales Amazon's only problem. Thill notes that wage inflation is at a 15-year high, which is likely to take a bite out of Amazon's profits this quarter. Indeed, according to the analyst, Amazon's operating income could remain "muted" throughout this year, as Amazon's profits will be doubly hit -- first, by higher wages for its employees, and second, by the fact that the number those Amazon employees collecting those higher wages has doubled since the pandemic.

Long story short, Thill still likes Amazon for the long term, and indeed he believes conditions could start improving for the company as early as H2 2022. The remainder of Q2, however, could still be a rough ride for Amazon. (To watch Thill's track record, click here)

Overall, AMZN has a rare bullish outlook according to the Street. TipRanks reveals that in the last three months, the stock has received 36 Buy ratings vs. just 1 Hold and Sell each -- giving it a Strong Buy analyst consensus. Meanwhile, the $178.66 average analyst price target translate into ~75% upside potential from the current share price. (See AMZN stock forecast on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.