Amazon (AMZN, Financial) is the world's largest e-commerce platform. They have dominated the industry for decades and were considered a “safe bet" for the longest time. However, recently the stock price has recorded it’s largest single day decline since 2006 - a whopping 14%. This was already on top of a sliding stock price since November 2021, leaving the stock price down 32% from all-time highs.
Is the market overreacting to recent bad news? Is the stock now a value opportunity? Let's take a look.
Earnings report
Amazon reported its first-quarter 2022 earnings results last Thursday. Revenue increased by 7% year-over-year, which was much less impressive than the 44% jump in the year prior. This growth rate is the second straight quarter of single-digit growth and the slowest since the dot-com bust of 2001. However, the company did beat revenue expectations overall.
It was for earnings per share that the company disappointed. Here is a full breakdown below. Earnings per share of $7.38 was less than the $8.36 expected by analysts on an adjusted basis. Operating cash flow decreased 41% to $39.3 billion for the trailing 12 months, compared with $67.2 billion for the 12 months ended March 31, 2021.
The company also reported lower advertising revenue at $7.88 billion vs. $8.17 billion expected.
The good news is, Amazon is growing in the right places with Amazon Web Services (AWS) beating expectations, reporting $18.44 billion in revenue vs. $18.27 billion expected. AWS saw meteoric growth of 57% in operating income to $6.5 billion, while total operating income fell to $3.7 billion from $8.9 billion in the prior year.
Amazon’s cloud business is the most profitable, highest margin and highest growth segment of the company. They are the dominant market leaders in cloud and continue to extend their lead.
Rivian write-down
While Amazon didn't disappoint too much on adjusted EPS, it reported an enormous GAAP loss per share. This was mainly because it took a paper loss when it sold shares of electric vehicle maker Rivian (RIVN).
Amazon was an early investor in Rivian, a manufacturer of stylish and last mile delivery EVs. Amazon owns 18% of the company and plans to buy 100,000 bespoke EV delivery vans for their fleet.
However, Amazon decided to sell some shares and record a $7.6 billion loss on its Rivian investment as the shares have been cut in half during the quarter. For clarity, this is a “paper loss” and a “balance sheet adjustment." The company hasn’t exactly lost $7.6 billion in cash, as some might misunderstand. This paper loss is just due to the share price's huge decline, and it's not like Amazon bought at the top. Moreover, writing down this investment will save them big bucks on taxes.
Lower guidance
Amazon has guided for slow growth in the second quarter of 2022, between 3% and 7% for the top-line. They project revenue of $116 billion to $121 billion, which is below the average analyst estimate of $125 billion.
Amazon has blamed much of the slowdown on geopolitical issues such as Russia’s invasion of Ukraine. Amazon CEO Andy Jassy stated the company is “squarely focused” on offsetting costs in its fulfillment network, now that warehouse capacity has reduced to normal levels. Amazon is in one of the best positions to ride the logistics issues as they already have a fleet of delivery planes , Amazon Freight and they have even been making their own shipping containers since 2018. The company has also introduced a series of measures to help to offset extra expenses, such as a 5% surcharge for some U.S. sellers, and increased the price of Prime from $119 to $139. This was the first price increase in four years.
Valuation
According to the GF value chart, a unique intrinsic value estimate from GuruFocus, the stock is significantly undervalued.
Amazon’s price-sales ratio is also just 2.73, the lowest level since 2016.
Overall, I believe Amazon is a fantastic company which still dominates the e-commerce market. The company has seen an increase in expenses this quarter and headwinds from global macroeconomic issues, but I believe these won't be permanent; the company will just suffer short-term slow growth thanks to the high-inflation environment. Amazon Web Services is still dominant, growing fast and the primary driver of profitability; thus, this is the key business unit to watch moving forward, in my eyes.
