That's awkward. In the run up to Christmas the world's biggest eCommerce company - not to mention cloud services provider to many of world's biggest companies - Amazon was yesterday (7 December) hit by computer problems. It is the third outage to hit the company this year.
Although the problems are now reportedly largely fixed the damage caused to the company's reputation could be serious although its share price rose 3% on the day.
The global reach of such an issue is a far cry from co-founder Jeff Bezos’s garage in 1994, where the company was created to sell books online. Today, Amazon has evolved to become a global e-commerce leader, with exposure to groceries, cloud storage, video entertainment and much more.
There is a good reason why Amazon stock trades north of $3,500 a share, and a quick visit back to the 2010s might explain why a $1.79trn valuation is justified.
Amazon’s stock lost around 25% of its value in 2014. Bezos communicated to investors a bold long-term plan, backed by his motto “Get Big Fast”. Short-term investors were quick to dump Amazon’s stock as quarterly results missed expectations.
Long-term bearish Amazon stock price predictions were proven wrong. Bezos executed his vision of building a dominant global empire, and faithful investors were rewarded.
The era of scooping up Amazon’s stock for less than $500 is a distant memory. But is it too late to buy Amazon’s stock heading into 2022?
Let’s take a look at recent Amazon stock news to better understand what direction the company may be heading in.
Amazon misses Q3 expectations
Amazon disappointed the market for the second quarter in a row causing its shares to drop 4.72%. Its third quarterly 2021 report showed that revenues were $110.8bn, slightly behind market expectations despite rising 15% year-on-year.
Operating profits or earnings were $4.9bn, 21% lower than the same period last year, and well off the $5.5bn analysts had expected. Earnings per share came in at $6.12 again missing the hopeful analyst estimates of $8.96.
Amazon shares closed 4.72% lower at $3,284.05 after the announcement although picked up the next day to close at $3,446.57.
Amazon also released Q4 2021 revenue guidance in the $130bn to $140bn range, anticipating an unfavourable foreign exchange environment and operating income less than half of the comparable 2020 quarter.
“We’ve always said that when confronted with the choice between optimising for short-term profits versus what’s best for customers over the long term, we will choose the latter – and you can see that during every phase of this pandemic,” said Amazon CEO Andy Jassy. “In the fourth quarter, we expect to incur several billion dollars of additional costs in our consumer business as we manage through labour supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs.”
Supply-chain disruptions and shipping costs
Amazon chief financial officer Brian Olsavsky said added costs due to supply-chain disruptions, and increased shipping and labour costs totalled $2bn in the third quarter, “particularly in August and September.” He added he expected the higher labour and shipping costs to persist and account for $4bn in the fourth quarter “as these higher costs will be felt for the full quarter.”
These higher costs are seen particularly in Amazon’s retail business segment, including bricks-and-mortar outlets. “We are very bullish on our physical store retail business,” Olsavsky said. “It is more expensive to service these businesses, but it is an important part of our profitability structure. We see ourselves as a shock absorber, absorbing the higher costs of the consumer.”
Amazon reported revenue growth across all three of its operating segments, although retail profits went backwards. North American sales rose 10.4% to $65.6bn, while operating profits of $880m were well behind the $2.3bn reported last year. The international operation reported sales of $29.1bn and an operating loss of $911m, that contrasts with $25.2bn and $407m profit reported last year respectively. While the cloiud computing business, Amazon Web Services (AWS) reported sales of $16.1bn, up 38.9%, and operating income of $4.9bn up 38.1%.
In the Amazon reported Q2 results in late July 2021, the company achieved its third consecutive quarter of topping $100bn in revenue. Revenue was $113.1bn up 27% on a year ago. A big beneficiary of Covid-19 lockdowns with hundreds of millions of people worldwide ordering online – as the world reopens, many pre-Covid shopping trends are returning.
Nicholas Hyett, equity analyst at financial services company Hargreaves Lansdown, said despite being consistently in the black the company was not solely foccussed on the bottomline and prepared to invest.
Amazon stock analysis: AMZN shares lagging the market
Amazon’s stock entered 2021 trading just shy of $3,280. After briefly dipping below the $3,000 mark in March, buying momentum picked up and by July the price had hit a new all-time high of $3,773.08.
But the momentum was short-lived and bears won the Amazon shares buy or sell tussle. Shares fell to the $3,200 level by the end of the summer and investors rejected a test of the $3,500 level in September. On 8 December they opened at $3,523.
What this means is that Amazon’s stock is up 7.4% from the start of 2021. Over the past one-year period, shares are up 11.77%. By comparison, the Nasdaq Composite index is up 24.7% over the one-year period.
Does this mean investors should buy Amazon’s stock?
Amazon stock seems to have found strong support at the $3,200 level and again at the $3,000 mark. Granted, Amazon’s stock is not guaranteed to bounce back from these levels. In fact, a dip below the $3,000 level may imply that Amazon’s stock could remain weak for some time.
Amazon stock forecast: What Wall Street analysts think
Amazon is among the most closely watched stocks on Wall Street, given its large size and appeal to investors.
According to data from The Wall Street Journal, 51 analysts currently provide Amazon stock projections. Among those, 42 recommend a ‘buy’ at current levels at the time of writing (8 December) and six rank it as ‘overweight’, making it one of the stronger stocks in its sector. Just three analysts recommend a ‘hold’. None of the surveyed analysts rate Amazon a ‘sell’.
RBC Capital Markets analyst Brad Erickson initiated coverage of Amazon’s stock in early October. In a note to clients, Erickson set a $4,150 price target on the stock, calling the company “one of the internet’s largest true alpha dogs”, according to TipRanks.
Amazon’s dominant position, the analyst argued, could result in it capturing incremental revenue from the trillions of dollars-worth of transactions taking place in physical stores.
Erickson’s view on Amazon’s stock is roughly consistent with his analyst peers. The average Amazon share price forecast among the 51 analysts covering the stock is $4,098, according to the WSJ. The lowest price target of $3,473 implies upside from 7 December closing price of $3,523.29.
At least one analyst modelled Amazon’s stock to hit $5,000 a share.
When looking for Amazon share price predictions, bear in mind that analysts’ forecasts can be wrong. Analyst projections are based on making a fundamental and technical study of the company’s past performance - past performance never guarantees future results. Do your own research and always remember your decision to trade depends on your attitude to risk, your expertise in this market, the spread of your investment portfolio and how comfortable you feel about losing money. And never invest more than you can afford to lose.
Downside risks still exist
Despite the fact that Wall Street analysts share positive sentiment on Amazon’s stock performance, investors should be aware of downside risk. Potential negative outcomes need to be balanced with positive ones in order to complete a useful AMZN stock analysis.
One of the more notable risks relates to currency fluctuations. As the global market continues to grow, the company needs to convert foreign currency to its base currency, the US dollar. Even small fluctuations can have a noticeable impact on Amazon’s bottom line, thereby impacting earnings.
Another risk to consider is the growing competition in the online retail space from small and large competitors. In particular, Walmart and Target have the financial flexibility and know-how to match Amazon’s moves. The same holds true in foreign markets that Amazon hopes to conquer. India in particular is a lucrative and fast-growing market, and Amazon needs to battle local companies that hold home-court advantage.
Covid-19 and the impact of new variants such as Omicron remains one of the key factors to watch. Amazon’s stock performance can be linked to the post-pandemic market. Covid lockdowns that prevented people from leaving their homes contributed to the company’s revenue growth amid an e-commerce boom. However, the trend could reverse as shoppers return to the high street. On 6 October 2021, the company announced the opening of its first bricks-and-mortar Amazon 4-star store outside the US.
Finally, Amazon’s long-term growth model requires management to continuously invest in its business. In some years, investment spend could be substantially higher, which might have an impact on the company’s profit and dividend generation.
Investors that require a dividend payment as part of their portfolio strategy could avoid Amazon as it might not generate consistent profits to support long-term and consistent dividend payments. At the moment of writing, the company stated that “it has never declared or paid cash dividends on our common stock”.
Despite dips in growth, Amazon holds a dominant share of the e-commerce market. Through prudent investment, Amazon has retained market share in legacy markets and gained market share in new markets.
Amazon outperformed the broader market in 2020, ending the year 70% higher. Is some of its future growth potential already factored into the current price? Short-term investors may be more cautious if they’re looking for a quick profit.
According to the positive Wall Street analyst sentiment outlined above, Amazon’s stock could be closely watched by investors seeking exposure to a company with a dominant market share.
However, Amazon’s stock is up 185,000% since its initial public offering. This could imply that future stock gains will be more in line with the broader market.
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