Amazon Stock: Is the Pullback an Investment Opportunity?

A slowdown in growth, pressure on profitability from incremental costs, and weak guidance wiped out billions from Amazon’s (NASDAQ:AMZN) market cap.

It’s worth noting that AMZN’s net sales growth slowed to 7% in Q1 of 2022 from 9% in Q4 of 2021. Further, Amazon expects its top line to grow by 3-7% in Q2, indicating a further slowdown. Management blamed the normalization in demand trends amid the economic reopening, higher transportation and production costs, and the pandemic for the slowdown in revenue growth and incremental costs.

Following the weak Q1 performance and guidance, AMZN stock closed over 14% lower on Friday. Meanwhile, it has lost more than 25% of its value this year. While Amazon stock has witnessed a pullback, could this be an opportunity to invest? 

Analysts Weigh In 

Unsurprisingly, Wall Street analysts cut their price targets and estimates for AMZN to account for the slowdown. However, their outlook hasn’t changed. Of the 40 analysts providing recommendations on Amazon stock, 38 have recommended a Buy, one analyst has a Hold, while one analyst has suggested a Sell. 

Deutsche Bank analyst Lee Horowitz reiterated his Buy recommendation on AMZN sock but lowered the price target to $3,500 from $4,100. While Horowitz lowered his revenue projection for 2022/2023, he expects revenue growth to accelerate in the second half. Further, he expects Amazon’s AWS business to benefit from digital transformation and sees AWS’s strong operating margin as the “brightest spot of a tough print.”

Notably, AWS’s operating margin (as % of AWS net sales) came in at 35.3% in Q1, reflecting strong growth on both a sequential and year-over-year basis. 

Along with Horowitz, Guggenheim’s Seth Sigman also maintained his Buy recommendation on AMZN stock. Sigman stated, “AMZN’s Q1 results and Q2 guidance were disappointing (sales and operating income) but don’t necessarily change the story.” He added that “growth should inflect in Q3 and set up for a stronger FY23.” 

Further, highlighting Amazon’s investments, the analysts added that “AMZN has gone through a major investment cycle,” and these investments will support its growth and drive its market share. Moreover, the analyst expects “volume to accelerate, productivity to improve, and the run-rate for incremental costs to moderate” in H2.

Bottom Line

A slowdown in growth and cost pressure could continue to play spoilsport in the near term. However, Amazon’s challenges are temporary. Further, Amazon’s growth is expected to reaccelerate as the year progresses and faces easier comparisons. Also, its investment into the business, ongoing momentum in the AWS business, the increase in Prime membership fees, and an acceleration in advertising bode well for growth. 

AMZN stock has an Outperform Smart Score of 9 out of 10. Further, the average Amazon price target of $3,703.95 implies 49% upside potential to current levels.

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