Time to Buy AMZN Stock at a Steep Discount?

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Amazon AMZN, the global e-commerce and web services company, reports Q4 FY22 earnings on Thursday, February 2 after the market closes. February 2 is a big day for tech earnings with both Apple AAPL and Alphabet GOOG set to report earnings after the close.

This last year has been a challenging one for AMZN stock. Over the trailing twelve months Amazon stock is down -33%, underperforming the broad market, which is down -10% over the same period.

With a slowdown in online spending, and inflation raising its transportation and fulfillment costs, Amazon is dealing with some painful headwinds in the short-term.

Yet, long-term prospects are still promising driven by the continued adoption of Amazon Prime internationally, and the rapid expansion of Amazon Web Services.

Business Model

Amazon’s primary business is e-commerce, which is powered by its sprawling fulfillment operations in North America, and rapidly expanding international presence. The e-commerce business is further bolstered by its Amazon Prime membership, offering subscribers free shipping and online content, among other perks. Prime members have shown themselves to be very loyal customers, and on average spend twice the amount of non-members.

Amazon’s ecommerce business is further extended by its physical retail footprint. With the acquisition of Whole Foods, Amazon has cemented its position in groceries, and as a physical retailer further enhanced by its broad infrastructure.

The ecommerce business also supports online, third-party vendors. Through its Amazon FBA (fulfilled by Amazon) program, online sellers can utilize Amazon’s robust fulfillment resources.

Amazon’s ecommerce business runs with very low margins. Similarly, to Costco COST, another leading US and international retailer, most of the profits come from the annual subscription fees. This business model allows both AMZN and COST to provide products at extremely competitive prices.

Story continues

Amazon’s other main business segment is Amazon Web Services. AWS is an online infrastructure business, providing web-based businesses cloud-computing services. In perfect contrast to the ecommerce business, AWS runs with very high margins, providing a strong source of cash flow to balance the business.

AWS was an early leader of the cloud infrastructure business, which explains its dominance in the highly competitive industry. According to Statista, cloud services spending globally was $217 billion over the last year. Amazon is currently the dominant business with 34% market share of the industry.


Image Source: Statista

In addition to their primary business segments, Amazon also has their devices business. This includes Fire TV, Kindle, Ring and Alexa. FY21 revenues were $470 billion split between three segments: North America segment generated 60%, International 27%, and AWS 13% of revenue.

Earnings Estimates

Amazon currently sports a Zacks Rank #3 (Hold), with a disconcerting Earnings ESP of -16%.

Zacks estimates call for Amazons Q4 sales to increase 5.9% to $145 billion, and FY22 sales to increase 8.6% to $510 billion. Because of its slim margins, and reinvesting, Amazon’s earnings numbers are usually a bit wonky, although not entirely reassuring.

Q4 earnings estimates are expected to be down -88%, to $0.17 per share, with FY22 earnings projected to fall -104% to -$0.13 per share. That wonkiness is illustrated by FY23 earnings which are projected to grow 1,300%, while sales are expected to increase 9.3% in the same period.

Consensus estimates continue to trend downward on all timeframes, hence the Zacks Rank #3 (Hold). Q4 estimates have more than halved over the last 90 days.

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Zacks Investment Research

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Notably, along with the other mega cap tech companies, AMZN recently laid off 18,000 employees. After the Covid boom Amazon pulled forward a huge amount of spending on infrastructure and new hires. Between 2019 and 2022 Amazon’s employee count went from 798,000 to 1,608,000, which puts the recent layoff into some important context.

Price Leads Earnings

An interesting topic floating around the Zacks Strategists group is the tendency of earnings to bottom after the stock prices bottom. It is worth considering that although AMZN earnings are being revised lower, it is possible that the stock has already bottomed out or is near a bottom.

The nature of markets is to act as a forward discounting mechanism.

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Zacks Investment Research

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Stock Performance

After a couple of decades of outperformance, it is quite surprising to see Amazon underperform the market index over the last five years. Although it is no longer the start-up of the early 2000s, with astronomical growth projections, expectations for the e-commerce giant are probably lower than they should be.

The last 5 years AMZN compounded at a very average 7.5% annualized, which is a far cry from its 20 year average of 25% annualized.

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Zacks Investment Research

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Amazon is in an interesting position with regards to its valuation. After last year’s selloff, Amazon’s one year Forward P/E of 60x is now well below its ten-year median of 95x. But considering the peculiarities of Amazon’s earnings figures, I think it may be useful to divide Amazon’s two primary business segments.

Price to Sales may be a simpler context for AMZN’s ecommerce business, while P/E ratio is useful for AWS. Recently while looking at Costco, a business very similar to Amazon’s ecommerce business, I noticed COST’s market cap was about equal to its annual sales.

Based on the most recent projections, we can estimate e-commerce sales to be about $430 billion and we will give the ecommerce segment a P/S multiple of 1x. AWS sales are estimated at $80 billion with ~40% net profits. With the exceptional growth expectations, I will give AWS a conservative 15x multiple, bringing that business to $480 billion market cap.

Add those together and you get a total market cap of $910 billion, which is below the current market cap of $990 billion. This is a very simplistic measure of Amazons business valuation, but I find it a useful exercise. By playing around with multiples, and sales projection this final number can vary drastically.


Amazon is an exceptional business, with very strong long-term prospects. Particularly interesting, which I think may be overlooked, is Amazon Prime’s international potential. With ~200 million total prime subscribers, and only 50 million of those from international markets, I think the potential speaks for itself.

With a slowing economy, AMZN is dealing with near term headwinds, but this shouldn’t cause one to discount Amazon’s powerful business engine. Sentiment usually follows price, and with the stock price down significantly, it is no surprise that the Amazon naysayers have been very loud. While there may be more downside for the stock in the short-term, it is hard to argue against the business fundamentals.

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