Source: PaxForex Premium Analytics Portal, Fundamental Insight
Amazon's 2021 results showed that the company is ready for a strong post-recession upswing, despite the lack of share price movement. The company's empire is expanding far beyond its flagship e-commerce business. In a sense, considering the variety of different industries in which the company operates, owning Amazon stock could be compared to owning an index fund.
Let's take a look at Amazon's results from last year and see how the company is laying a solid foundation for triumph in the road ahead and could be a great long-term investment in 2022.
In 2021, Amazon's e-commerce revenue was $407.6 billion, a 20 percent increase over the previous year. This boost was evenly split between the North American and international segments. Despite strong revenue growth, operating margins in both segments declined compared to last year. North America's operating margin in 2021 was 3%, down 1% from 2020. The International segment declined even further, as the 2021 operating loss margin for this line of business was a negative 1%, compared to a positive 1% in the prior year.
The decrease in operating profit was since expenses grew faster than revenues. The increase in expenses was primarily due to labor shortages and inflationary pressures. Amazon CEO Andy Jassy acknowledged these challenges during the earnings call and said, "in spite of these short-term challenges, we continue to be optimistic and enthusiastic about the business as it emerges from the pandemic."
Importantly, management believes that the problems caused by the pandemic will subside, and in the long term, the company is making the right conclusions to expand its business.
While e-commerce makes up the majority of Amazon's revenue, its cloud business is quickly becoming the fastest-growing and most profitable. In 2021, Amazon Web Services (AWS) revenues were $62.2 billion, a 37 percent increase over last year. In the last quarter of 2021 alone, AWS brought $17.8 billion in revenue, putting it on track to reach more than $70 billion in revenue. It's quite possible that cloud computing will be Amazon's next $100 billion revenue stream.
Possibly even more optimistic than the strong revenue growth is what this growth comes from. It is not uncommon for companies to devote a significant portion of their budget to sales and marketing to drive growth. Highlights of Amazon Web Services in 2021 include the signing and expansion of major clients such as Rivian, Meta, Under Armour, Goldman Sachs, Pfizer, and Nasdaq. Amazon has proven that its cloud business can simultaneously acquire new customers and expand its existing base, resulting in very high profitability. Amazon Web Services had operating profits of $18.5 billion in 2021, a 37% increase over the previous year.
Even though the e-commerce business is operating near break-even, the profits from Amazon Web Services have more than offset other short-term losses. They have allowed Amazon to reinvest in the business. The company has wasted no time in moving beyond retail and cloud computing, and its attention is now focused on the entertainment industry.
At first glance, Amazon may appear to be in decline. The company's 12-month operating cash flow fell 30% year over year to $46.3 billion, and free cash flow fell to $9.1 billion for the 12 months ended Dec. 31, 2021, compared with an inflow of $31.0 billion for the 12 months ended Dec. 31, 2020. But executives acknowledged that the lack of profitability in the e-commerce business is directly related to supply chain and inflation problems, side effects of the pandemic.
Amazon doesn't let these obstacles hold back its long-term ambitions. The company understands the dynamics of the broader economic environment and believes that if it invests a dollar today, it will be worth much more in the future, even if it has to take some preliminary losses. Investors see Amazon aggressively investing in its business in the form of wage increases as well as strategic efforts in entertainment, consumer electronics, etc.
Over the past 12 months, Amazon's stock has fallen about 5 percent. Moreover, the company's management expects that the same problems it experienced in the fourth quarter of 2021 will persist into the early months of 2022. Considering the longer time horizon, it becomes more apparent that 2022 could be a good time to invest in Amazon stock. Despite the short-term issues and influence on cash generation, the company has done an excellent job of developing new verticals and improving existing businesses. For this reason, Amazon is well-positioned to return to activity in the coming years
As long as the price is above 2801.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 3042.00
- Take Profit 1: 3452.00
- Take Profit 2: 2623.00
Alternative scenario:
If the level of 2801.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 2801.00
- Take Profit 1: 2520.00
- Take Profit 2: 2357.00
