Amazon.com: Still Mighty On Solid Fundamentals (NASDAQ:AMZN)

Investment Conclusion

Following upbeat F4Q2022 financial results, we remain constructive on Amazon.com, Inc. (NASDAQ:AMZN), as outlined in our initiation report on the company, published in January. Although, earnings disappointed driven by a ~$2.3 billion loss in AMZN’s investment in Rivian Automotive, Inc. (RIVN), revenue growth rebounded, particularly in North America, and Amazon Web Services (AWS) continued to shine with high double-digit year-over-year growth.

Longer-term, all of AMZN’s businesses have significant sales growth ahead of them, based on greater penetration into existing markets, and expansion into new regions. In addition, gross margins are bound to escalate as the high gross margin services businesses (Third Party Seller Services, Amazon Prime, Subscriptions, Advertisements, and AWS), begin to account for a larger fraction of the corporation’s total revenues. In addition, we expect gross margins associated with the international e-commerce business to eventually improve, as the scale of the initiative achieves peak velocity. Further, operating leverage is on cards, based on economies of scale associated with corporate overheads, marketing and technology, as their cost/dollar of sales declines, due to a dramatic increase in revenues. Net-net, AMZN appears promising on a long-term basis.

Over, the short-term, we expect the recent momentum in sales to continue, fueled by easier comparables, and a rebound in grocery and produce sales, due to the deteriorating macroeconomic environment, as spending shifts from discretionary items to normal goods. In addition, margins are well-positioned to expand as lower spending associated with the layoffs and shuttering of logistical facilities, gets reflected. Consequently, it is highly likely that earnings and free cash flows will improve materially, relative to recent figures, over upcoming quarters.

Given AMZN’s solid revenue growth over F4Q2022, we are confident that the firm will achieve our long-term revenue and earnings growth objectives. Therefore, we are reiterating our Buy Rating and 1-Year Price Target of $140/share, derived utilizing a 10-year Discounted Cash Flow model.

Key Takeaways From The Fourth Quarter

F4Q2022 Results Summary. For the quarter, revenues were ~$149 billion (+9% compared to F4Q2021), and loss per share came in at $0.03 (versus earnings per share of $1.39, during the same quarter last year). On a year-over-year basis, operating margins declined by 70 bps to 1.8%. Net income for F4Q2022 was ~$278 million, versus ~$14.3 billion, over the previous year’s same quarter.

During the period, the firm generated operating cash flows of $46.8 billion and free cash flows of negative $11.6 billion. At the end of F4Q2022, the company had a cash and cash equivalents balance of ~$53.9 billion and long-term debt of ~$67.2 billion, on its balance sheet.

For FY2022, revenues were ~$514 billion (+9% compared to FY2021), and loss per share came in at $0.27 (versus earnings per share of $3.24 during the previous year). On a year-over-year basis, operating margins declined by 290 bps to 2.4%. Net loss for the period was ~$2.72 billion, compared to net income of ~$33.4 billion, over the prior year.

Business Likely Insulated From An Economic Downturn

Given the types of businesses it operates, we do not consider continuing weakness in the macroeconomic climate, as a major headwind for AMZN. Our argument is driven by several factors, including that the firm is not a luxury retailer which derives its revenues from discretionary spending, which plummet during recessions. Instead, AMZN’s revenues are for the most part driven by sales of essential items, including grocery and produce, which typically do not experience spending cuts during a financial crisis. In the context of grocery and produce, sales increase during fiscally challenging periods, as folks opt to cook at home, for-going food-away-from-home, according to data released by the Bureau Of Labor Statistics (BLS).

In addition, the pullback in discretionary spending, is also likely to reflect favorably on Amazon Prime (with growth in memberships), as the service’s Prime Video will possibly turn increasingly popular, as financially stretched customers find at-home entertainment more appealing, and the free one-day delivery on AMZN purchases, highly convenient.

Further, the firm’s advertisement revenues are likely to accelerate as advertisement budgets shift to AMZN, due to the decline in popularity of Google Search, the decrease in personalization associated with Meta Platforms’ (META) advertisements due to Apple’s (AAPL) updated cookie policy (that requires customer consent for tracking their off-platform activity), and the shift in focus towards normal goods, due to the weakening macro-economic environment.

Moreover, as ~85% of U.S. enterprises utilize AWS as their cloud computing platform, revenues associated with the business are likely to be sustained, although growth rates might moderate.

Cumulatively, AMZN’s business appears relatively well-positioned to weather an economic downturn and even emerge stronger, following a potential recession.

Layoffs Will Probably Boost Business

AMZN is in the middle of downsizing ~10% or 18,000 of its employee base, mostly in support roles at its warehouses and fulfillment centers. The firm is being forced to recalibrate its capacity requirements, to bring the element in line with the post-pandemic growth reality. Clearly, future growth is unlikely to revisit levels anywhere close to the COVID-19 era. Therefore, as it will take years for sales to achieve levels that will require capacity built for viral outbreak growth figures, it appears reasonable to shutter warehouses and fulfillment centers, and lay-off associated employees.

Overall, the downsizing is a prudent maneuver. The effort will optimize AMZN’s operations and reflect in significant cost savings, which can be reallocated to essential projects, or allowed to flow through to the bottom-line, boosting profits and free cash flows.

Bottom Line

Businesses such as AMZN’s are rare. The company has been growing rapidly for years, and still has significant runaway growth ahead. In addition, despite the large size of the organization, the business is as nimble and dynamic, as a start-up.

In the U.S. (its largest revenue generator), AMZN has zero competition (Walmart (WMT) is mostly brick-and-mortar). In foreign territories, it is expending significant resources to gain the lead. Given, its scale and scope, almost unlimited resources, and intellectual prowess, not to mention substantial experience in scaling international markets, we believe AMZN will eventually prevail in numerous geographies.

In particular, we expect the firm to secure the spoils in India (its largest market where is has ~31% market share), which Jeff Bezos’ characterized as a generational bet, given its ~1.4 billion population.

Net-net, shareholders are more than likely to benefit strongly if they invest in AMZN’s stock, for the long term.