First-quarter earnings reports are in full swing, and all eyes are on big tech. FAANG member Amazon (AMZN -1.98%) recently reported mixed results, with most investors focusing on the company’s flagship e-commerce business. At first glance, the lackluster results in Q1 may cause some to question the direction Amazon may be headed.
However, with a long-term mindset, the sell-off in the stock following the earnings report may be a blessing in disguise. So let’s analyze Amazon’s first-quarter results across all aspects of the business and determine if now may be an opportune time to buy.
Should investors be worried about an e-commerce slowdown?
For the quarter ended March 31, 2022, Amazon’s online stores generated $51.1 billion in sales, representing a 3% decline year over year. Additionally, the company’s North American and International segments, both of which are primarily comprised of e-commerce, posted operating losses of $1.6 billion and $1.3 billion during the first quarter.
On the surface, it may seem alarming that Amazon’s largest business of online sales is experiencing slowing growth and operating without profitability. However, during the conference call, management provided thoughtful detail about the e-commerce business and what the future could hold.
Amazon’s Chief Executive Officer, Andy Jassy, commented on the online business dynamics. More specifically, he reminded shareholders that consumer demand sparked by the COVID-19 pandemic forced Amazon to double the size of its fulfillment network. Although this took nearly two years and significant capital to complete, management believes that the company no longer faces staffing capacity or physical storage constraints. The primary objective is to achieve cost efficiencies through its new, larger fulfillment network.
Jassy addressed this challenge head-on by stating that achieving this goal will take time as Amazon combats continued challenges from inflation and supply chain disruption. However, one silver lining is that investors learned that Amazon had improved its delivery speed performance and is now reporting levels congruent with the early months of 2020 before the pandemic.
Although revenue growth in the online consumer business declined year over year, investors should keep in mind that e-commerce companies experienced more pronounced demand during the height of the COVID-19 pandemic. Overall, management seems to have a solid plan regarding the long-term profitability profile of the consumer business. Despite near-term challenges related to inflation and hiccups in the supply chain, Amazon has incurred the upfront costs related to increased labor needs for the fulfillment network in order to achieve long-term profitability and margin expansion.
The cloud could be significantly undervalued
Amazon’s cloud business, Amazon Web Services (AWS), grew 37% year over year during Q1 2022 by posting $18.4 billion in revenue. While AWS is well on its way to becoming Amazon’s next $100 billion revenue stream, investors should be keenly aware of its margin profile. For the quarter ended March 31, 2022, AWS reported 35% operating margins compared to 31% during the same period prior.
These results are particularly encouraging for a few reasons. First, Amazon is able to reinvest the profits from its cloud unit into other areas of the business. For example, the expanding margins from AWS and its subsequent cash flow benefits facilitate Amazon’s needs on the consumer side by providing the company with the financial flexibility to increase hiring and fulfillment needs. Additionally, a number of high-profile Wall Street investors have not only praised Amazon’s growth in the cloud but have alluded to this business segment being significantly undervalued.
It is important to note that cloud computing is still in its early innings. Given the increased adoption of remote work as well as companies increasingly relying on big data to help with real-time business decisions, IT leaders face the challenge of transitioning more budget spend from on-premise solutions to cloud computing protocols. Amazon will directly benefit from this dynamic and could witness significant growth in AWS in the years ahead.
Keep an eye on valuation
As of writing, Amazon stock is trading at just 2.4 times its trailing-12-months sales. This ratio is the lowest level in over a year. Moreover, the stock is down 26% over the last month and nearly 34% year to date.
Third Point Capital founder and CEO Dan Loeb recently wrote a letter to his clients in which he made a case for Amazon being 40% undervalued. The crux of his thesis hinged on the underappreciated value of AWS. Although the cloud could be a long-term catalyst for the stock, Amazon also carries some objectives near-term that could spark some life back into the stock.
Earlier this year, Amazon announced a 20-for-1 stock split alongside a $10 billion stock repurchase. Generally speaking, stocks tend to move higher immediately leading up to a stock split, as well as over the long term after the stock split occurs.
Although Amazon’s consumer business faces near-term headwinds, the company’s cloud business is thriving. Additionally, the upcoming stock split and buyback could provide a much-welcomed jolt for the stock over the next few months. Given the heavy selling following the earnings report, coupled with the near-term and long-term catalysts, now may be an ideal time to dollar-cost average into Amazon stock.