It has been a mixed earnings season for FAANG shares, just like the previous quarter. Netflix, Alphabet, and Amazon shares crashed following the earnings release. Even Apple shares looked weak despite posting better than expected earnings. Facebook parent Meta Platform was the only FAANG share to have seen strong buying interest after the earnings release.
Talking of Amazon, the shares had spiked after the fourth-quarter earnings release. The shares had largely held their ground in 2022 despite the broader market sell-off. However, the shares tumbled just over 14% on Friday. It was the worst fall for the e-commerce and cloud giant and it fell to a two-year low. What’s the forecast for Amazon shares and should you consider buying it now?
Amazon first-quarter earnings: Key takeaways
Amazon reported revenues of $116.44 billion in the first quarter. The revenues increased 7% YoY. After adjusting for unfavourable currency movements, the revenues increased by 9%. Nonetheless, the revenues were slightly ahead of the $116.3 billion that analysts were expecting.
However, there are worrying trends in the company’s topline growth. It was the slowest quarterly growth for Amazon since 2001. It is also the second consecutive quarter of single-digit growth. During the COVID-19 lockdowns, markets got accustomed to high double-digit growth from Amazon. However, like fellow stay-at-home companies, Amazon is now witnessing a severe growth slowdown.
The guidance also spooked investors
Amazon’s revenue guidance for the current quarter also spooked investors. The company said that it expects to post revenues between $116-$121 billion in the second quarter of 2022 which would mean a YoY growth of between 3-7%.
Looking at the first-quarter performance, AWS was the saviour for Amazon, as it has been for the last many quarters. The segment’s revenues increased to $18.44 billion in the quarter which was ahead of the $18.27 billion that analysts were expecting. However, the advertising segment’s revenues came in at $7.88 billion which was short of the $8.17 billion that analysts were expecting. Notably, in the fourth quarter Amazon impressed markets with its advertising revenues. The spectacular performance had come at a time when companies ranging from Facebook to Twitter had warned of headwinds in their core advertising business.
Amazon posted a loss in the quarter
Amazon posted a net loss of $3.8 billion in the quarter. However, the net loss was driven by the $7.6 billion hit that the company took on its investment in electric vehicle startup Rivian. Even Ford booked billions of dollars of losses on its Rivian investment in the quarter. The loss wasn’t unexpected as Rivian shares had tanked in the first quarter. Both Ford and Amazon reported stellar earnings in the fourth quarter as they booked gains on the Rivian investment. Looking at the current price action, both these companies might need to book losses on Rivian in the second quarter as well.
Loss on Rivian investment
After adjusting for the Rivian loss, Amazon’s earnings were below what the street was expecting. William Blair, which had an outperform rating on the shares, said in a client note, “Under the hood, the company reported an $8 billion pretax loss related to its investment in Rivian Automotive. Recall the company reported a $12 billion benefit in the prior quarter related to the investment. We estimate the company’s earnings per share excluding the investment-related loss would be roughly $3.40, still 60% below consensus as the company continues to face headwinds related to shipping, labor, excess capacity, and tough prior-year comparisons.”
Amazon’s operating income
A peek into the breakup of Amazon’s different segments reveals that only AWS reported an operating profit in the quarter. The North American e-commerce business reported an operating loss of $1.56 billion in the quarter while the international business reported an operating loss of $1.28 billion. In the current quarter, the company expects its operating income to be between -$1 billion to $3.0 billion.
Costs are rising
In the earnings call, Amazon said that higher wages and other inflationary pressures added around $2 billion to its incremental costs in the quarter. The company added that while it was understaffed previously, it is overstaffed now which is leading to lower productivity. It added, “We estimate that this overcapacity, coupled with the extraordinary leverage we saw in Q1 of last year, resulted in $2 billion of additional costs year over year in Q1. We do expect the effects of the fixed cost leverage to persist for the next several quarters as we grow into this capacity.”
The company saw an overall $6 billion in incremental costs in the quarter which included $2 billion from overstaffing but said that two-thirds of these costs are controllable. The company has doubled its employees over the last two years and had 1.6 million employees at the end of March. It said that its employees peaked at 1.7 million during the quarter. The company could lower its headcount further as growth slows.
Analysts lower target prices on Amazon
After the earnings release, multiple analysts lowered Amazon’s target price. Piper Sandler which has an overweight rating on the shares lowered its target price from $3,900 to $3,400. Raymond James also lowered their target price from $3,950 to $3,300. Deutsche Bank also lowered its target price from $4,100 to $3,500.
Susquehanna, which had the street high target price of $5,000 on Amazon, cut the target price to $3,800. “The inflation of wages and shipping costs have been pressuring Amazon’s profitability, and now the war in Ukraine has driven up fuel costs, adding another headwind,” said Susquehanna analysts led by Shyam Patel. They added, “Also pressuring profitability is excess capacity, as Amazon invested heavily in 2H21 and is now working to reverse the fixed-cost deleverage and increase productivity.”
Evercore ISI, BMO, Truist Financial, Needham, and Benchmark are among the brokerages that lowered Amazon’s target price after the earnings release.
Should you buy or sell AMZN now?
While multiple analysts lowered Amazon’s target price, they maintained their ratings. The median target price still implies a decent upside in Amazon. Amazon has now joined the long list of companies that are facing serious growth headwinds. The company is now looking at controlling costs. We saw something similar with Netflix. After reporting a fall in paid subscribers, the company said that it would now look at tackling the menace of password sharing.
Amazon shares trade at an NTM (next-12 months) PE multiple of 67.7x. The earnings might remain depressed for the next couple of quarters as Amazon also pointed out. However, both cloud and e-commerce are secular growth themes for the next couple of decades. While the broader market volatility would continue to impact the price action in the short term, Amazon looks a good share to buy for the long term after the crash.
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