Don't Believe The "Uninspiring" Part
Retail giant Amazon ($103) suffered after reporting its fourth quarter results last week even though $150 billion in revenues came in up 9% YoY compared to $137 billion a year ago. Even so, the company only posted a profit of $300 million or $0.03 per share, a sharp decline from the $14.3 billion or $1.39 per share it posted a year ago. This was a mixed quarter, with a beat on the top line, and a huge miss on consensus estimates at the bottom.
The company’s slowest ever quarterly growth in its 25-year history, coupled with a weak guidance for the upcoming quarters led the stock down by over 8%. Amazon was faced with a broad range of headwinds during the quarter, taking a $5 billion hit to the top-line from unfavorable foreign exchange rates, followed by supply-side issues owing to persistent lockdowns in China that have since come to an end.
Amazon’s full year figures were interpreted as equally "uninspiring," with revenues at $514 billion, up 9% YoY, and a loss of $2.7 billion, or $0.27 per share, against a profit of $33 billion, or $3.24 per share during the same period last year. This was mostly the result of a $12.7 billion valuation loss from its stake in Rivian Automotive during the year, along with the excess capacity the Online Commerce side of the company acquired during the pandemic and is now winding down.
During the quarter, Amazon Web Services once again led the way when it comes to sales growth and profit contribution. Revenues from the segment stood at $21.4 billion, up 20% YoY, with a profit of $5.3 billion, flat from the year before. This, however, marked a substantial deceleration from previous years, and came in below analyst estimates of 28% YoY growth.
AWS growth has been slowing down since 2015, in the face of saturation and rising competition, but things fared worse than expected during the quarter, as most enterprises across the world have started to cut back on cloud and tech spending in the face of broader uncertainties. This trend is expected to continue this new year, as the global economy sits firmly on the precipice of a recession.
Amazon had a few bright spots in its quarterly results that still anchor its broader, long-term growth story. This mainly pertains to its burgeoning advertising business which posted 19% growth YoY, while Google’s and Meta’s platforms struggle with a slowdown. This relatively new service already makes up 7% of the global digital advertising market, with a long multibillion-dollar runway ahead.
The stock has witnessed a pullback of almost 50% since its peak of $185 in November 2021, and trades at a perfectly reasonable two times sales. The company is yet to deliver value in the form of repurchases or dividends, but this will change as the economy continues to grow and its high margin services business continues to flourish. With nearly $60 billion in cash, $165 billion in debt, and $40 billion in cash flow, this company is a force to reckon with.
Our Target is $205 and we would never sell the stock. Amazon has continued to deliver exceptional value to consumers across many fronts, with its Prime streaming service continuing to gain traction, plus new partnerships commenced with HBO and Discovery during the quarter. Yes, the company had a rough time last year, but the company is a leader in retail and groceries, as well as the Cloud, and they continue to launch newer, high margin businesses such as healthcare, financial services, and supply-chain management, among others. Management will do everything in its power to remain at the top of its game and thrive in the future of world commerce. We believe in this company.
