AMZN with Nobias technology: Are Amazon's Investments Setting It Up For Future Growth?
Amazon (AMZN) was one of the biggest winners of the pandemic period during 2020. When business shut down, social distancing regulations were put into place which bolstered the world-from-home and stay-at-home economies, and ultimately, consumers changed their lifestyle and spending habits, Amazon’s sales and earnings soared.
The eCommerce industry, which Amazon dominates domestically, saw significant growth during 2020. And, the pandemic accelerated cloud-related spending, which bolstered the Amazon Web Service’s volumes as well. All of this led to the company posting total returns of nearly 78% during 2020.
However, last year, during 2021, this positive momentum tailed off in a major way. Last year, AMZN shares were up just 2.65%. This means that Amazon was the worst performing F.A.N.G. (Facebook, Amazon, Netflix, Google) stock of 2021.
Amazon shares also underperformed many other popular big-tech stocks, which aren’t a part of the original F.A.N.G. cohort, such as Apple (AAPL), Adobe (ADBE), Microsoft (MSFT), Oracle (ORCL), and Salesforce (CRM). What’s more, this perennial out-performer underperformed the broader market by a wide margin as well (the S&P 500 was up approximately 27% during 2021).
AMZN Jan 2022
It’s true that the massive growth that AMZN experienced during 2020 made it tough for the company to beat its COVID-19 comparisons. Right now, the analyst consensus earnings-per-share estimate for AMZN’s full-year sits at $40.95, which is 2% below the company’s 2020 full-year bottom-line result of $41.83. And to some, the stagnant earnings growth that AMZN produced during 2021 might justify the stock’s relative underperformance. However, it’s also important to note that stocks are generally priced upon expectations regarding their future cash flows and with that in mind, the analyst community is much more bullish on AMZN’s 2022 and 2023 prospects.
Right now, estimates for AMZN’s consensus earnings growth rates during 2022 and 2023 are 26% and 47%, respectively. In other words, Wall Street expects to see Amazon’s growth reaccelerate in the coming years, back up to the levels that helps the stock become one of the best performing equities in the entire market over the prior couple of decades. So, with these strong consensus future growth expectations in mind, we wanted to take a look at AMZN shares and the recent reports on the stock that the credible authors and analysts that our algorithm tracks have published to see if Amazon’s lackluster 2021 performance has created a buying opportunity for longer-term investors.
John Ballard, a Nobias 5-star rated author, recently published a report at The Motley Fool, calling Amazon his “Top Stock For 2022”. Ballard’s piece was published on 12/28/2021 and the began highlighting a somewhat contrarian stance, saying that because of its ”dominant position in e-commerce, cloud computing, and its growing advertising business” and AMZN’s recent ~27% relative underperformance (compared to the S&P 500) he expects to see the stock bounce back nicely in 2022.
Ballard wrote, “History shows that better returns usually follow when great companies see their stock prices underperform.” With regard to the stock’s recent sales figures, Ballard said, “The online juggernaut reported 15% revenue growth in the third quarter and expects to report top-line growth between 4% and 12% to close out the year. Those numbers are not what investors are used to seeing from the e-commerce leader.” However, he notes that these poor year-over-year growth figures only appear to be weak because of the fantastic growth results that they’re being compared to from the 2020 period.
Ballard brought up the fact that other major retail names, such as Walmart (WMT), Target (TGT), and CostCo (COST), all of which have outperformed AMZN in recent quarters. However, he believes that this sentiment being shown by the market might be short sighted. Regarding these retail competitors, Ballard wrote, “But one important advantage Amazon has over these retailers is more cash. It is currently investing aggressively to expand its warehouse capacity and build an unrivaled global transportation fleet to take greater control of its supply chain. CNBC recently reported how Amazon has spent the last few years making its own cargo containers to bypass the bottlenecks at the ports in California.”
“Despite those investments,” Ballard continued, “Amazon ended the third quarter with $79 billion of cash and short-term investments sitting in the bank.” Ballard points out that at the end of their most recent quarters, Walmart had $16.11 billion of cash/cash equivalents on its balance sheet. CostCo had just $13.48 billion. In other words, Amazon has unique resources which should allow it to win competitions involving CAPEX.
Amazon has already increased its warehouse, fulfillment center, and logistical capacity by roughly 100% during recent years. And, as Ballard says, because of its continued investments, “Amazon may be on the verge of applying greater pressure than ever before on its biggest rivals.”
When Amazon invests heavily in its operations, it hurts it’s free cash flow results. However, Ballard believes that these short-term investments have the potential to result in strong long-term results for AMZN investors. He said, “Amazon's free cash flow was a negative $2.2 billion through the first nine months of 2021. That's due to a 78% increase in capital spending this year, climbing to $38.9 billion. This might look bad, but it points to profitable growth since Amazon is capable of generating a high return on invested capital.” With the strong future growth potential created by the company’s strong capex spending in 2020 and 2021 in mind, Ballard remains very bullish on Amazon’s share price trajectory.
Adria Cimino, another Nobias 5-star rated author, recently said that her New Year’s Resolution was to “Buy More Amazon” shares. Why? Well, because of many of the same reasons that Ballard highlighted. Cimino, too, sees the company’s near-term investments as a boon for longer-term results. In her article, Cimino pointed out that over time, not only have Amazon’s sales and net income grown at a very reliable rate, but so has its return on invested capital. In short, this company, which is known for its cutting edge innovation and efficiency, is becoming even better at putting capital to work in a profitable manner as its business scales.
Cimino noted that at the end of 2020, Amazon's return on invested capital result was up to 18.45%. This was more than double the ~8% result that the company posted during 2018. Like Ballard, she notes that the company’s near-term results may suffer because of ongoing investments related to the pandemic and the global supply chain issues that continue to wreak havoc in the manufacturing, production, and shipping industries.
Cimino said, “The company even said the fourth quarter would bring "several billion dollars of additional costs." That's as Amazon deals with issues impacting the sector as a whole -- such as supply chain problems and higher shipping costs.” However, she says, “Many of these problems are temporary.” And therefore, once they’ve abated, the investments that Amazon has made should truly separate this company’s operations from its peers.
“At the same time,” Cimino continued, “Amazon emphasized it would limit the impact on customers and partners that sell goods on the platform. And this is why I'm confident about the success of Amazon's business down the road. The company aims to keep its audience happy -- and that should keep customers and sellers coming back. It's also important to remember that e-commerce isn't going away. Worldwide retail e-commerce will rise more than 16% to $4.92 trillion this year, according to an eMarketer forecast. Amazon, as a leader, stands to benefit.”
Cimino also pointed out that the market share and efficiency gains that the company is expected to make in the online retail space aren’t the only reasons to be bullish on AMZN shares. She said, “Finally, Amazon's cloud computing business is another reason to be optimistic about future growth. Amazon Web Services (AWS) is the world's leading player, and its sales climbed 39% in the third quarter.” In conclusion, Cimino wrote, “As for Amazon's market performance, the stock has progressively climbed more than 1,700% over the past decade. Gains haven't happened overnight. Instead, they've accompanied Amazon's accomplishments. Everything Amazon is doing today -- along with the strength of AWS -- makes me confident this trend will continue over the long term. So I'm not worrying about the current rough patch. Instead, I'll look for opportunities to buy more of this great long-term stock.”
Priti Ramgarhia, a Nobias 5-star rated author, recently posted an article at Nasdaq.com which highlighted data pointing towards bearish Q4 results. Ramgarhia began her piece by highlighting the large hiring plan that Amazon has recently laid out, largely centered around growth in its Austin, Texas and Phoenix, Arizona Tech Hubs, which should support its long-term growth. However, in the short-term, Ramgarhia points towards website traffic data which is worrisome in the short-term. Using data from Semrush, she points out that Amazon’s website recorded a 26.53% decrease in global visits in November compared to the same period last year. Also, a quarter-to-date comparison showed a decrease of 28.58% compared to Q4 2020, and the year-to-date website traffic decline stands at 5.09%.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Once again, this is a part of the narrative surrounding the tough 2020 comparisons that Amazon continues to deal with as it reports 2021 results. The bad news is, this data points towards negative growth on a year-over-year basis, once again. However, the good news is, the company’s 2022 results will be up against these relatively tepid 2021 comparisons, which should allow the company to return to growth.
Looking at the overall community of credible authors that the Nobias algorithm tracks, a clear trend is developing: the vast majority of these individuals appear to be willing to look past Amazon’s near-term headwinds and instead, focus on the stock’s long-term growth potential. 87% of the reports posted by the credible authors that we track have included “Bullish” sentiment. Looking at the credible Wall Street analysts that we track (only those with 4 or 5 star ratings), the average price target currently being applied to AMZN shares is $4147.22. Right now, Amazon shares trade for $3251.08. Relative to the average price target above, this current share price points towards upside potential of approximately 27.6%.
Disclosure: Of the stocks mentioned in this article, Nicholas Ward is long AMZN, APPL, MSFT, GOOGL, FB, ADBE, and CRM. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.