Source: PaxForex Premium Analytics Portal, Fundamental Insight
Amazon has proven that it can deliver returns to investors over time. Over the past decade, the retail giant's stock has risen more than 800 percent, to more than $3,000 last year. Meanwhile, the company's revenues and profits have grown by billions of dollars. And key metrics such as free cash flow and return on invested capital have grown over time.
Since the beginning of the year, however, Amazon's stock performance has declined. The stock has lost about 37%. This is because issues such as rising inflation and supply chain problems have hurt earnings. Even Amazon's recent stock split did not translate into a rise in the stock. Given all this, what is an investor to do? Before making a decision, let's look at two reasons to buy Amazon right now - and one reason to sell.
1. The future of e-commerce
E-commerce is growing. And Amazon is well-positioned. In the U.S. alone, e-commerce sales could exceed $1 trillion this year, according to Insider Intelligence forecasts. And Amazon accounts for about 40% of U.S. e-commerce sales, according to Insider Intelligence.
Why isn't it certain that Amazon will continue to dominate? Because of Prime's subscription program. As of 2020, the company had more than 200 million members. And in recent quarters, Amazon has been attracting "millions" of new members. Members pay a fee for the program, and in return, they get free same-day or same-day delivery of orders, as well as a host of other benefits.
In Amazon's latest earnings report, the company said that Prime members have been relying more and more on Amazon for their shopping and entertainment over the past two years. It's easy to imagine that this trend will continue as members appreciate the convenience of the service. Here are two particularly good signs: Amazon says membership renewal rates remain high. And members are spending more and more.
2. The power of AWS
Amazon is not just about e-commerce. The company's biggest profit driver is actually Amazon Web Services (AWS). This is Amazon's cloud computing business. Last year, it accounted for more than 70% of the operating income of the entire company. AWS is the global market leader. It has held between 32% and 33% of the market for the past several years, according to Synergy Research Group.
And AWS is not currently under as much pressure as Amazon's e-commerce business. In the first quarter, AWS posted double-digit growth in sales and operating income. Those numbers totaled $18.4 billion and $6.5 billion, respectively. This was due to AWS continuing to attract large customers. For example, Spanish telecom operator Telefonica is using AWS for technologies such as 5G private networks.
AWS' growth is likely to continue. The company is expanding AWS infrastructure around the world. It plans new local zones in 32 metro areas in 26 countries. These zones bring AWS services closer to the public and large information technology zones. And Amazon has said it will increase infrastructure spending this year to support the growth AWS is seeing. Thus, AWS looks to be a long-term profit driver.
Rising inflation is a problem for Amazon as it affects the company's expenses. In its earnings report, Amazon said that the rise in inflation is likely to last longer than the company originally expected. This is due to the fact that the war in Ukraine is affecting fuel prices. Amazon said it now costs more than twice as much to ship in international containers as it did before the pandemic.
To keep prices competitive, Amazon is not passing on the higher costs to customers. This is the right decision for long-term business because it will keep customers coming back. But in the short term, it could hurt revenues.
Another problem with higher inflation: Shoppers also face higher prices on everything from necessities to entertainment. So they may make fewer non-essential purchases at this time.
All of this means that Amazon's revenue problems may not be limited to one or two quarters. The struggle could drag on for a long time.
The answer depends on your individual situation. For example, if you've owned Amazon stock for many years, you may want to short your position and lock in some profits. Problems with the stock may continue until the economic situation improves. And that may take some time.
But for most others, I think the reasons to buy Amazon far outweigh the reasons to sell. Analysts like the long-term prospects for the e-commerce and cloud computing business. Amazon is also taking steps to control costs that it can control - such as performance-related costs. All of this means that in the long run, Amazon - and its investors - could win again.
As long as the price is above the 104.00 level, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 106.78
- Take Profit 1: 111.00
- Take Profit 2: 115.00
Alternative scenario:
If the level of 104.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 104.00
- Take Profit 1: 102.60
- Take Profit 2: 101.00
