That double in Amazon’s stock from its pandemic low to its peak in the summer of last year is mostly gone now.
The e-commerce and web services giant is no longer a trillion dollar company.
But that’s a good thing.
As Amazon restructures, reassesses and repositions, it may be time for investors to consider reloading on the stock.
Like many of its products over the holidays, the shares are on sale, down about 50 per cent from their highs.
Amazon is unlikely to grow like it used to but many fund managers and analysts believe that five years out, this taming of a juggernaut is merely a temporary setback.
Get John O’Connell’s views on the future of Amazon, and read some analysts’ commentary.
Piper Sandler analyst Thomas Champion wrote this past week, AWS controls more than 50% of the cloud market and remains on track to hit the $100 billion revenue mark in 2023.
That’s more than triple the level at Salesforce CRM +2.00% (CRM), which is growing at half the rate of AWS.
Give Amazon ’s cloud unit a comparable valuation, and it would represent more than half of Amazon ’s current market cap of around $940 billion.
And, as I argued in July, I think the business is easily worth more than that.
But online stores are just part of the e-commerce story for Amazon.
The company has an enormous infrastructure of warehouses and delivery workers, which power its third-party seller services business, as well as a growing advertising arm that helps Amazon sellers draw attention to their wares.
The third-party business should reach $125 billion in 2023, while the ad segment should top $44 billion, more than a third the size of the Meta platform ad business.
During the pandemic, Amazon aggressively built out its platform—head count has doubled since the end of 2019 to more than 1.5 million.
Amazon has conceded it overshot and has lately reversed course, cutting staff and shuttering some warehouses.
That’s where things get interesting.
MoffattNathanson analyst Michael Norton has launched coverage of the e-commerce sector and recommended just one stock – Amazon.
Norton’s approach largely ignores AWS and focuses on Amazon’s e-commerce arm, which he thinks is undervalued.
Norton’s argument is that Amazon has been slowly turning around, paying new attention to its cost structure.
He estimates the company spent $81 billion on fulfillment and transportation infrastructure from 2020 through 2022 and that Amazon is now positioned to reap the rewards.
The analyst thinks Amazon will show improving unit economics on fulfillment as it reins in costs.
Norton expects the company’s spending on fulfillment and transportation to drop from an estimated $25 billion this year to $10 billion in 2025.
Norton’s view is that Wall Street estimates are too high for capital expenditures and too low on free cash flow.
He thinks improved operating leverage and additional expense controls should drive pretax earnings 18% above Wall Street estimates in 2023, and 9% above the consensus in 2024.
The analyst sees Amazon profits of $1.93 next year—way above the Street, at $1.68.
Norton sees pretax margins reaching 4.8% next year and 6.7% in 2024, up from an estimated 2.5% this year.
One useful way to evaluate Amazon’s e-commerce business, Norton writes, is by dividing its gross merchandise value—the total value of goods sold—by square footage of warehouse capacity.
He notes that Amazon’s business by that measure peaked in 2020—thanks to the Covid-related shutdowns—at $1,255, falling to an estimated $918 this year, as capacity expanded and growth slowed.
But he predicts the measure will rebound to $1,058 a square foot by 2025.
“Profit beats and declining capital intensity are the formula for multiple expansion,” Norton adds.
“For three years, Amazon has experienced multiple compression as pretax earnings estimates declined and capital intensity was greater than expected.
We believe we are at the end of the tunnel.”
Amazon shares have dropped by about 50% since their November 2021 peak, losing nearly $1 trillion in market value in the process.
But as Piper’s Champion notes, a 56% decline in 2008 set the stage for a 270% rally over the following 12 months.
Past performance, as they say, is no guarantee of future results.
But given Amazon’s dominant position in cloud computing and e-commerce, I like the odds.
This holiday season, Amazon shares could be the gift that keeps on giving.
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