Multinational tech firm Amazon (NASDAQ: AMZN) is now a household name worldwide, with very good reason.
The consumer behemoth is a major global presence in a host of distinctive areas. For many years now, Amazon has led the way in everything from e-commerce and digital streaming to cloud computing and artificial intelligence (Top AI stocks to invest in).
Amazon's e-commerce website, which initially only sold books, has ballooned over the years. It's now the world's largest marketplace, selling an astounding array of products from games to toilet rolls.
In fact, it's commonly known as "The Everything Store" thanks to its incredibly diverse range of products.
Founded by Jeff Bezos in 1994, Amazon has come to dominate the tech industry – becoming one of the so-called "Big Tech" companies or "Big Five" alongside Facebook, now Meta (NASDAQ: META), Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ: GOOGL).
AMZN stock is currently trading 48% below its 52-week high but 9% above its June low.
Here, we look at whether the enormous profits early investors in this millennium's biggest business success story have enjoyed will continue in the coming years.
Indeed, with Bezos also relinquishing some of his control, stepping down as CEO after a long, controversial tenure, it's worth revisiting the company's fundamentals and asking, Is Amazon A Good Investment For 2022?
AMZN Q3 Highlights
Amazon reported its Q3 2022 revenue grew 15% Y/Y to $127bn but just missed FactSet analyst estimates. And earnings per share (EPS) of $0.28 beat analyst expectations despite being $0.10 less Y/Y.
The biggest concern to shareholders came in operating and net margins, which were down significantly Y/Y.
Furthermore, inflation is affecting the business, and forward guidance coming below Wall Street expectations sent panic in the stock market, causing the AMZN share price to fall 20% in the hours after the Q3 earnings release.
Third-party seller services rose 18% Y/Y, and third-party sellers accounted for 58% of all units sold in Q3.
Both subscription services and advertising services enjoyed Q3 growth, up 9% and 25%, respectively.
Amazon Cash Burn
AMZN has been burning through cash, mainly in operating expenses which include technology and content along with sales and marketing.
The main reason for Amazon's cash burn is that it is investing heavily in a big push to up its game in delivering high-quality Prime video content. Q3 saw this reap rewards as Lord of the Rings enjoyed 25 million global viewers on its first day and led to more Prime sign-ups than any other Amazon original.
Furthermore, its addition of Thursday Night Football was also a hit. During the first game, AMZN enjoyed its three biggest hours of US Prime signups in its history.
Meanwhile, foreign currency exchange rates hit the bottom line harder than expected. The energy crisis in Europe is also weighing on its international results and affecting cash flows.
Amazon’s recent spending spree has hit its cash reserves, with it now on a net cash-even basis, giving investors pause for thought.
AWS Update
At Amazon Web Services (AWS), net sales rose 27%, but the company sees signs that customers are being more cautious and spending less. AWS margins also contracted from 30% to 26%, which is a red flag. This is a high-margin area of the business, and not one shareholders will want to see stall.
The downturn in crypto could be a concern here for high energy costs, and low returns may lead AWS’ crypto customers to reduce their AWS consumption.
Brian T. Olsavsky, CFO & Senior VP, Amazon.com, Inc., said:
With the ongoing macroeconomic uncertainties, we’ve seen an uptick in AWS customers focused on controlling costs, and we’re proactively working to help customers cost-optimize, just as we’ve done throughout AWS’s history, especially in periods of economic uncertainty
Amazon believes its full-year fulfillment and transportation investments will be down -$10bn as it aligns with demand. And this will be offset by a $10bn Y/Y rise in technology infrastructure to support the rapid growth of AWS.
Fundamentals of Amazon Stock
Amazon's share price at the time of writing is $94.12.
In March 2022, Amazon.com Inc. (AMZN) announced its first stock split since 1999. The 20-1 stock split went into effect on June 6. Many investors were delighted at the move as it gives the stock a more appealing price point.
The P/E (what is a P/E ratio?) still eye-wateringly high at 86. It also has a 1.9x price-to-sales ratio, down from its maximum of 5.55x back in September 2020.
AMZN stock's popularity soared in 2020 as lockdowns and unease around enclosed spaces led to a boom in e-commerce. The company's digital streaming business also prospered with so many people stuck at home, looking for new content to watch.
In 2020, annual net sales jumped more than $100bn to $386.1bn from $280.5bn in 2019.
The trend continues, as the first six months of 2022 saw total net sales of $237.6bn, up from $221.5bn Y/Y.
In Q3, 2022, Amazon brought in revenues of $127.1bn, meeting the mid-point of its guidance between $125bn and $130bn for the quarter.
Analysts estimate Q4 will see revenues of $146.7bn.
However, the company also takes risks, and capital expenditure is up. Amazon spent over $55bn on Capex last year, with this year's figure expected to rise above $60bn.
The company continues to invest heavily in Amazon Web Services (AWS) and Prime. Plus, M&A is never far from reach. Amazon is invested in electric van company Rivian, which is causing losses to date. Although Q3 saw a $1.1bn pre-tax gain as the RIVN share price climbed.
Amazon also recently announced plans to acquire iRobot (NASDAQ: IRBT) for $1.7bn. The acquisition is pending approval from shareholders and regulators and is under pressure from watchdogs demanding an investigation into the deal.
What Does Amazon Do?
Amazon.com, Inc. is an online retailer and commerce business that offers a wide range of products. The company products include books, music, computers, electronics, and numerous other products. Amazon offers personalized shopping services, Web-based credit card payment, and direct shipping to customers. Amazon also operates a cloud platform offering services globally.
Analyst Ratings
55 FactSet analysts have a consensus Buy rating on AMZN stock with a target share price of $135.94.
Piper Sandler adjusted Amazon.com's share price target to $119 From $125 while keeping its Overweight rating.
Goldman Sachs maintains its Buy rating.
MoffettNathanson starts Amazon.com at Outperform with a $118 AMZN share price target.
Tigress Financial cut its AMZN stock price target to $192 From $232 but retains a Buy rating.
What is the Bull Case for Amazon?
With a $1trn market cap Amazon is the most visited online retail website. One of the most important numbers out there when it comes to Amazon is its explosion in Prime members. It now has over 200 million Prime members globally, up from around 150 million in 2020. 153 million of these are in the US.
These users not only pay their $139 per year ($14.99 a month) fee but also spend more on Amazon than non-Prime members.
The beneficial effects of the pandemic on e-commerce have lessened, which should bring an end to the company's pandemic-related costs. However, inflation is now pressuring margins, and the company has raised its third-party seller costs to try to offset this.
Broadly speaking, Amazon's financials are compelling, with continued net revenue growth, despite overall growth slowing.
A key driver has been the rising popularity of online shipping. Statista forecasts a rise in global e-retail revenues to $7.4 trillion in 2025 from the 2020 figure of $4.28 trillion.
Given Amazon's prominence in this area, it stands to see a massive benefit from the shift away from brick-and-mortar stores.
Moving on from shopping, there's AWS, the firm's cloud computing platform, which continues to grow. AWS delivered net sales of $45.4bn in 2020, up from $35.1bn in 2019. Then, in the first half of 2022, net sales were $38.1bn, up from $28.3bn Y/Y. But margin pressures are concerning and this is an area shareholders will be paying close attention to in the coming months.
AWS boss Andy Jassy took over as Amazon's CEO in July 2021. With Jassy having headed up the thriving AWS unit since 2003, there's reason to be confident in the company's leadership.
Add to that Bezos' decision to remain as company chair, and the firm looks set to stay the course.
What is the Bear Case for Amazon?
Still, there are reasons to be cautious when it comes to Amazon.
Amazon is facing pressure in the US from House lawmakers who have put forward bipartisan legislation to set new limits on Amazon and other Big Tech firms.
These bills, announced in early June 2021, would make it unlawful for Amazon to privilege its own products on its platform. And it would also be unlawful for the company to own any businesses that used its platform to sell products or services.
But Amazon and its big tech peers are fighting back to derail the ground-breaking bipartisan bill.
Outside of potential regulatory trouble, the world is facing economic turmoil with rising interest rates and the threat of a recession, causing consumers to be more cautious in their spending.
Competition is also worth considering. Amazon Prime Video competes with Netflix (NASDAQ: NFLX) and Disney (NYSE: DIS). Likewise, AWS competes with Google Cloud and Microsoft Azure.
All these factors are worth considering when deciding whether to invest in Amazon stock right now.
Is Amazon Still a Good Investment?
As a long-term bet, there's still a case for buying Amazon stock.
While things may not be smooth-sailing for the firm all the time – with competition, regulation, and a significant leadership change – the company has shown it can weather storms when they arise.
The incredible size and scope of the company, combined with an increasing appetite for online shopping, make investing in Amazon worth considering for any portfolio with a long-term horizon.