Amazon shares popped after delivering better-than-expected second-quarter earnings, following a weak result from Walmart and Meta earlier in the week which had set expectations low for Amazon’s e-commerce and advertising businesses. The stock ended up recovering strongly after hitting a 2-year low in June, as sentiment on the stock continues to shift more favourably post result.
Note, Amazon undertook a 20-for-1 stock on 27 May 2022
Unlike its mega-cap peers, Amazon is not as profitable as it continues to invest heavily into its wide array of business, and its core e-commerce business operates at lower margins (and delivers a loss on certain quarters) as it faces short-term headwinds. This is not a new approach, with Amazon continuing its long-term practice of sacrificing profits when it sees opportunities to improve service to its customers, growing top-line revenue aggressively, to later focusing on widening margins with bigger scale.
Amazon has been reliant on Amazon Webservice Services (AWS) to drive profitability and is still forecasted to achieve solid ~30% over the medium term. Two other segments to note is the Subscription services and Advertising, the later managing to outperform major advertising peers and a space to watch.
We believe Amazon is a great company and while its core e-commerce business will be stagnant, it is key to being supplemental to its other growth business units. We maintain a BUY (High-Risk) rating on Amazon rating due to its growing tech businesses (AWS, Subscription and Advertising). We believe Amazon will continue to grow from strength to strength over the long-term as it expands its products and services. however, the share price is still more prone to market sentiment near-term particularity towards its e-commerce business more prone to softening in a slowing economic environment – for that reason it comes with a high-risk rating.
