After the recent Q4 2021 that not only missed consensus revenue target, reported negative operating and free cash flows but also delivered a rather muted guidance for Q1 2022 the stock jumped double digits in a single day rally that added well above USD100m in market cap overnight. While they have delivered a tremendous EPS beat that is down to their investment in Rivian, this alone cannot explain the sudden optimism.
Where many investors may be confused, here I would offer some thoughts that may explain what is going on.
1. Remember that PayPal, Visa and a few other payment players reported before Amazon with many reporting weak results and guidance citing challenging retail conditions. As such,many were probably expecting worse from Amazon. As it turned out, what Amazon delivered was a positive surprise. Q1 2022 guidance was muted, but this is coming off additional growth on top of Q1 2020 where they delivered an astounding 37% YoY growth.
2. AWS, their single most profitable business segment, is accelerating in growth for the 5th consecutive quarter. There are no signs of slowing here and this is super exciting!
3. The biggest positive surprise is the size of their advertising business segment that they broke out and reported seperately for the first time and the results were astounding. To put it in perspective, this segment is already contributing revenues of USD 31b. That's achieving contribution of half the size of AWS revenues from a segment that was producing under USD 2b just 3+ years ago. It's awesome to see a profitable segment grow thisquickly!
4. There is also a lot of cheer for their intention to raise prices for Amazon Prime, yet another source of profitable revenue. This segment is no slouch either, also raking in about half the size of AWS revenue.
5. Investors were also probably glad to hear, in general that they are managing on-going issues in supply chain well and that there is no bottleneck in capacity. Management explains this is down to their decision to pull in stocks in advance and invest in capacity beforehand that resulted in a hit on operational / free cash flows.
6. Also, management has indicated some moderation of capital investment going forward in some areas, which likely means that they believe the road ahead is a lot smoother from here on out.
7. This is also a call where managment has explicitly gave a name to their logistic segment that possibly telegraphs their intention to be a lot more serious in this segment which is another possiblereason to be cheerful.
All in all, there is a lot of reason for optimism here hidden behind the headlines.
So is it worth investing after the recent price pop? At current valuations, even after the large jump, we are still looking at a PS ratio of about 4x. With nearly 1/3 of their revenue coming from fast growing high margin business ie AWS, advertising etc. I'd argue that current valuation looks like an absolute bargain.
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