Throughout the pandemic, Amazon (AMZN) invested in its fulfillment and delivery network. The company has also been on a hiring spree and has raised wages. All have resulted in elevated costs. Now, to offset the cost increases, the ecommerce giant has announced its FBA (fulfillment by Amazon) fees are set to rise by an average of 5.2%, beginning on January 18.
While this is bad news for sellers, specifically those who use the FBA service, Morgan Stanley’s Brian Nowak thinks it will be good news for shareholders, as the price increase provides a "potential ~$1bn (3%) cushion to '22 EBIT.”
Historically, Amazon increases its FBA price by roughly 2%-3% per year so this hike is larger than normal. Nowak estimates Amazon’s FBA revenue haul in 2021 was around $45 billion, with the present 2022 forecast based on a typical ~2-3% annual increase incorporating 18% growth and resulting in revenue of $54 billion. “As such,” the 5-star analyst notes, “~5% pricing increase would add an incremental ~$1.2bn of revenue and (assuming an 80% flow through) ~$1bn of EBIT.”
But there’s a bigger picture to look at here. While Nowak thinks that the 5% pricing increase “may not be material alone,” the analyst believes it is just one example of the “many levers and factors” which set the company up to to “deliver stronger multi-year profitability.”
These include Covid costs declining, Amazon’s scale and “high margin revenue streams,” improving on labor inefficiencies, while Nowak also ponders whether a Prime price increase is in the cards, too.
As such, the analyst believes the current valuation is “under-appreciating the multi-year durability of top-line retail revenue growth and company-wide profitability (from retail and high margin revenue streams) as the company grows into its outsized '20/'21 build.”
Going by Nowak’s $4,000 price target, the “under-appreciation” means Amazon shares are presently undervalued by 12%. (To watch Nowak’s track record, click here)
Amazon is a unique beast on Wall Street with large and unanimous coverage; all 30 recent reviews are positive, naturally resulting in a Strong Buy consensus rating. The $4,095 average target is a touch higher than Nowak’s objective and set to generate returns of 14% in the year ahead. (See Amazon stock analysis 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 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.
The retail season is poised to be in full swing, given the upcoming holidays. The National Retail Federation (NRF) is optimistic about the upcoming holiday season.
According to the NRF’s estimate, holiday sales in the month of November and December are likely to increase year-over-year between 8.5% and 10.5% and be worth $843.4 billion and $859 billion, respectively.
Using the TipRanks stock comparison tool, let us look at how two biggies in the retail space, Amazon and Alibaba, stack up before the holiday season begins and examine how Wall Street analysts feel about these stocks.
Amazon (AMZN)The fourth quarter is seasonally a strong quarter for Amazon. The company will offer “more Black Friday deals than ever before” at its Black Friday event starting on November 25 and lasting through November 26.
However, the company is also facing multiple difficulties in Q4, including rising wage costs, global supply chain constraints, a shortage in labor supply, and an uptick in freight and shipping costs.
Considering these headwinds, Amazon announced last week that it was raising its referral and Fulfilled by Amazon (FBA) fees in the United States starting from next year. The company stated in its press release, “…costs are rising and we now need to make adjustments to next year’s fee structure in response. In 2022, we will adjust FBA fulfillment fees to partially offset the higher permanent operating costs we face going forward.”
Amazon also mentioned in its press release that since the pandemic started, it had invested over $15 billion to double its fulfillment capacity in the United States, ramped up the average starting wage in the United States to $18 per hour, and hired around 628,000 people.
Indeed, the company had stated on its Q3 earnings call that it expects its operating costs to double from $2 billion in Q3 to $4 billion in Q4, while net sales are likely to take a hit of around 60 basis points due to foreign exchange fluctuations.
In Q4, AMZN anticipates net sales to be between $130 billion and $140 billion. In contrast, Guggenheim analyst Seth Sigman expects net sales to grow 9.4% year-over-year to $137.4 billion against consensus estimates of $137.8 billion. (See Analysts’ Top Stocks on TipRanks)
The analyst, while bullish on the stock, maintains that “both sales and margin momentum have moderated for AMZN in 2H21, which has also pressured the stock (it has bounced recently but still toward its low in relative valuation terms).”
Sigman added that while the sales issue is due to a difficult comparison to its sales a year back and a “tight product supply” amid rebounding traffic at retail stores, margins are under pressure from higher operating costs.
But will Amazon recover from these headwinds? Yes, is the analyst’s answer. Sigman expects that by the middle of next year, “AMZN’s market share gains [will] reaccelerate,” driven by normalization of retail traffic recovery early next year.
Another key driver could be the company’s capacity build out, which "should support incremental sales and operating leverage through FY22” as well as its improving product supply.
More importantly, analyst Sigman feels that the stock currently “reflects the cyclical risks (which are real and factored into our model), but not the structural positives, including the changes in consumer behavior from the pandemic, growth in its customer base, and potential for share gains to accelerate through FY22/FY23 as it expands its faster fulfillment options.”
As a result, the analyst is of the opinion that AMZN is “one of the best investment opportunities based on potential acceleration in sales/EBITDA vs. current trends and valuation upside.”
Sigman has a Buy rating and a price target of $4,300 (20.4% upside) on the stock.
The rest of the Street sides with Sigman with a unanimous Strong Buy consensus rating with 31 Buys. The average Amazon price target of $4,095 implies 14.6% upside potential to current levels.
Alibaba (BABA)Alibaba’s regulatory woes continued this week, as it had a run-in with Chinese regulators, who fined the company. According to a Global Times report, the Chinese regulator, State Administration for Market Regulation (SAMR) slapped a fine of $78,300 each on major Chinese companies including Alibaba, Baidu (BIDU), Tencent Holdings (TCEHY), and JD.com (JD).
The fine was due to a violation of China’s “anti-monopoly rules in 34 mergers and acquisitions (M&A) deals which they [Alibaba] failed to declare," according to the report.
This news and the worse-than-expected Q3 results resulted in the stock plunging approximately 18% in the past five days.
Mizuho Securities analyst James Lee also perceives regulatory risk as a key risk factor for the stock. Indeed, according to the TipRanks Risk Analysis tool, BABA is at a higher legal and regulatory risk of 26.4%, as compared to the sector average of 16.8%.
In the fiscal second quarter, while Alibaba’s revenues soared 29% year-over-year to $31.15 billion, they still fell short of consensus estimates of $32.1 billion. Adjusted diluted earnings came in at $1.74 per American Depository Share (ADS), a fall of 38% year-over-year, missing the consensus estimate of $1.93.
When it comes to Customer Management Revenues (CMR), it went up by only 3% year-over-year to $11.13 billion, primarily “due to single-digit physical goods GMV [gross merchandise value] growth that resulted from slowing market conditions and more players in the China e-commerce market," according to the company's press release.
CMR revenues made up 36% of BABA’s total revenues in fiscal Q2. (See Top Smart Score Stocks on TipRanks)
Analyst Lee expects “CMR to grow less than GMV growth as opposed to higher in FY21, as BABA continues to provide lower commissions to merchants as part of its retention initiatives.”
Going forward, the analyst anticipates CMR revenues to grow in “single-digits for the next few quarters.”
This negative aside, Lee noted other positives for the stock, including strength in cloud and international revenues, and new investments in Community Group Buying (CGB) and Taobao Deals.
In fiscal Q2, Taobao Deals saw 240 million active buyers while according to Lee, CGB saw GMV rise 250% quarter-on-quarter. Taobao Deals offers value-for-money products for price-conscious consumers.
As a result, Lee noted, that despite macro headwinds, “the company plans to continue to invest in lower-tier markets using a multi-app strategy while defending its core market share.”
The analyst remained bullish on the stock, with a Buy rating, but lowered the price target from $245 to $215 (57.4% upside) on the stock.
Other analysts on Wall Street echo Lee’s view and remain bullish with a Strong Buy consensus rating on the stock, based on 20 Buys and 1 Hold. The average Alibaba price target of $216.10 implies 58.2% upside potential to current levels.
Bottom LineWhile analysts remain bullish about both stocks, both e-commerce giants are battling on different fronts. AMZN is facing rising operating costs that could pressure its margins over the near term.
In contrast, Alibaba is facing macro headwinds and increasing regulatory scrutiny.
It remains to be seen how these two companies will ride these challenges. However, based on the upside potential over the next 12 months, Alibaba does seem to be a better Buy.
Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.