Amazon: Where One Door Closes, Another Opens
Last week, $Amazon.com(AMZN)$ 's stock rose about 1%, even after $Wells Fargo(WFC)$ downgraded it from "Overweight" to "Equal Weight" on October 7. Despite this, Amazon underperformed compared to the $Invesco QQQ(QQQ)$ , which saw a 2.3% increase.
Wells Fargo's concerns stem from Amazon's investments squeezing profit margins and a weakening positive impact from its advertising revenue. However, they remain optimistic about the company's long-term prospects.
Profit Margin and Investment Trends
Wells Fargo has lowered its price target for Amazon from $225 to $183. Interestingly, this target aligns closely with the stock’s current price, suggesting that they do not foresee a significant drop in the next year. This presents an opportunity for long-term investors to buy in at a relatively low risk.
Amazon’s operating profit margin dropped by 2% compared to last year. Additionally, the company’s capital investments surged by 50% year-over-year, with expectations for increased investments in the second half of the year. Despite the pressure on profits, Amazon’s stock valuation is at a historical low, indicating that these factors are already reflected in its current valuation.
The Five Major Businesses Are Thriving
On a positive note, AWS saw its year-over-year sales growth accelerate from 17% in Q1 and 12% in Q2 to 19%. This segment generated $26.3 billion, surpassing analyst expectations of $26 billion. Analysts expect AWS to continue its growth trajectory, potentially exceeding forecasts again this quarter.
Amazon is actively working to improve profit margins in its e-commerce business. The company is ramping up its use of automation and robotics, expanding same-day delivery facilities, and regionalizing its inbound network.
The advertising sector is a bright spot for Amazon. With high-profit margins, its advertising business is poised for accelerated growth, contributing modestly to overall revenue. Notably, Amazon has secured over $1.8 billion in upfront ad commitments from marketers this year, positioning itself well for continued growth into 2025.
Additionally, Amazon plans to stream NBA games on Prime next year, opening up new revenue streams through live sports advertising.
Amazon’s pharmacy business is also showing promise. CEO Andy Jassy reported significant growth, and with the U.S. retail pharmacy market valued at nearly $570 billion last year, capturing just 5% more market share could boost Amazon’s sales by almost 5%.
Valuation Insights
Amazon's expected EV/EBITDA ratio is currently at 14.4, which is above the industry average of 10.1 but is also a historical low for the company. Its EV/EBITDA ratios for 2023, 2022, 2021, and 2020 were 19.88, 28, 21.27, and 32.2, respectively.
As of October 7, Amazon’s price-to-earnings ratio dropped from 102.65 in June 2023 to 43.25. On October 8, the company’s EV/FCF ratio stood at 40.5, down from 47.6 in January 2024 and 82 a year ago.
Amazon appears to have multiple positive drivers, including strong performance in AWS, e-commerce, advertising, and pharmacy sectors. Importantly, even Wells Fargo acknowledges the company's optimistic long-term outlook. With valuations at historical lows, now might be an opportune time for investors to consider Amazon.
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