Source: PaxForex Premium Analytics Portal, Fundamental Insight
Amazon's stock experienced a 7% increase last week following the release of its third-quarter report. The company's revenue surged by 13% year over year, reaching $143.1 billion, surpassing analysts' expectations by $1.5 billion. Notably, its net income more than tripled, reaching $9.9 billion, equivalent to $0.94 per share, which exceeded the consensus forecast by $0.34.
While Amazon continues to grow, questions arise about its suitability as an investment, considering the prevailing macroeconomic challenges impacting the e-commerce and cloud sectors. To make an informed decision, let's delve into Amazon's growth rates and valuations.
In the third quarter, Amazon derived 61% of its revenue from its North American division, 22% from its international unit, and 16% from Amazon Web Services (AWS), the world's largest cloud infrastructure platform. All three of these segments faced difficulties in the past year due to inflation affecting consumer spending on e-commerce platforms and macroeconomic headwinds restraining spending on cloud-based services.
However, over the last three quarters, Amazon has witnessed stabilization in both its North American and AWS segments, while its international unit's growth has gained momentum. Consequently, the company's total revenue growth has accelerated over two consecutive quarters.
During the third-quarter conference call, Amazon CFO Brian Olsavsky attributed the stability in North American sales to several factors, including the "biggest Prime Day event ever," logistics upgrades, increased participation of third-party sellers, and the expansion of its integrated advertising business. These improvements offset the impact of "lower spending on discretionary items" by cautious, price-conscious consumers.
Amazon's international business saw an upturn as macroeconomic conditions improved, and currency headwinds subsided. CEO Andy Jassy noted that the company's emerging international stores continued to grow on a "strong trajectory."
Regarding AWS, the cloud platform's growth stabilized as it attracted more clients and introduced new generative AI features. Although many companies were still optimizing their cloud spending, this process began to slow down as they shifted their focus toward innovation and bringing new workloads to the cloud.
Nevertheless, it's worth noting that AWS's growth is slower than its closest competitor, Microsoft's Azure, which reported a 29% year-over-year revenue increase in its latest quarter.
As Amazon's sales growth stabilized in the third quarter, its operating margin increased by 580 basis points year over year and 210 basis points sequentially, reaching 7.8%. This expansion was primarily driven by higher North American operating margins, reduced operating losses in its international business as economies of scale kicked in, and improved AWS operating margins, mainly due to layoffs.
This stability suggests that Amazon is actively working to boost the margins of its lower-margin non-cloud businesses, rather than solely relying on the higher-margin revenue generated by AWS to offset losses in other areas.
For the fourth quarter, Amazon anticipates its operating margin to expand by 370 basis points year over year, reaching a midpoint of 5.5%. This represents a sequential decline from the third quarter, as Amazon's operating margins typically dip during the holiday quarter due to increased promotions and deliveries on its e-commerce platforms.
Analysts project a 5% increase in Amazon's revenue for 2023 and a 12% rise in 2024. Despite a substantial net loss in 2022 due to investments in the electric vehicle (EV) maker Rivian Automotive, analysts expect Amazon to return to profitability in 2023, with a projected earnings growth of 44% in 2024.
Amazon's stock currently carries forward earnings multiple of 39, suggesting it is reasonably valued. The company appears to be steadily overcoming its major challenges. While it may not revisit its all-time highs in the near term, it still holds significant upside potential in the current challenging market environment.
As long as the price is above 123.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 127.58
- Take Profit 1: 133.00
- Take Profit 2: 140.00
Alternative scenario:
If the 123.00 level is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 123.00
- Take Profit 1: 118.00
- Take Profit 2: 113.00
