Amazon (NASDSAQ:AMZN) has grown to be one of the biggest companies in the world. However, if you pit the stock’s success over the past 3 years against that of the S&P 500, you might be surprised to learn how badly Amazon has underperformed over the period. AMZN shares are up by a paltry 14% vs. the SPX’s 63% gain.
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This is a fact noted by J.P. Morgan analyst Doug Anmuth who says he “continues to believe investor sentiment on AMZN is near multi-year lows.” While Anmuth remains a fully-fledged Amazon bull, he thinks there are 6 major issues bothering investors and he recently set out to address these concerns.
One revolves around AWS “revenue growth deceleration.” AWS revenue growth fell from +37% year-over-year in 1Q22 to +20% in 4Q22. As cloud customers adjust spend in the difficult macro as Amazon assists in optimizing costs, in the current quarter (1Q23), growth appears to be tracking up mid-teens %. While Anmuth believes the current environment “represents the first period of real macro pressure the cloud industry has ever faced,” making it hard to know where growth bottoms out, he thinks the issues are temporary. “We continue to believe the AWS deceleration is macro-driven, and our conversations with select large cloud spenders suggest willingness to re-accelerate spending in a better environment,” the 5-star analyst explained.
Meanwhile, faced with multiple margin headwinds over the last year, AWS operating margins have compressed from 35.3% in 1Q22 to 24.3% in 4Q22. Here Anmuth thinks Amazon is addressing this issue and is “taking meaningful steps to control costs while still investing for growth, & certain pressures should ease and/or lap in 2023.”
Other concerns revolve around the compression of North America operating margins and ballooning international operating losses. For the former, Anmuth sees improvement on the way, although the latter issue might be harder to solve, at least over the near-term, as the “macro challenges are likely to continue to persist in Europe and elsewhere, which will drag on the bottom line.”
Problem number 5: In each of the past 2 years, Amazon has delivered negative FCF, in the process, collectively losing over $20 billion. Yet, boosted by North America OI improvement, and expected capex declines, Anmuth expects FCF will “significantly inflect in 2023.”
Lastly, there are question marks regrading the success of Andy Jassy’s tenure as CEO. While Anmuth notes that investors felt his priorities did not come across as clear as they could have in the Q4 earnings call, he believes Jassy remains “very focused” on improving the cost structure at the company.
Essentially, what it all boils down to is that AMZN remains Anmuth’s Best Idea with the analyst reiterating an Overweight (i.e., Buy) rating on the shares. Although the price target is lowered from $142 to $135, the new figure still suggests 36% gains could be in the cards over the coming year. (To watch Anmuth’s track record, click here)
Overall, AMZN has received an impressive 38 analyst reviews recently. More impressive, 37 of those are to Buy, against just one Hold. The stock is priced at $98.95 with an average target of $136.86, indicating potential for an 38% upside this year. (See Amazon stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
