Amazon’s stock (NASDAQ: AMZN) took a hit on 2nd August, dropping 8.8% following the company’s announcement of second-quarter results that missed revenue estimates and issued lower-than-expected financial guidance for Q3. This decline was further exacerbated by weak labor market data, with the unemployment rate rising to 4.3% in July, sparking fears of an economic slowdown. The current price of AMZN stock at $168 is trading 20% below its fair value estimate of $210 by Trefis. This recent performance is reflective of the overall volatility and underperformance of AMZN stock compared to the S&P 500 index in recent years.
Despite the challenging economic environment, AMZN stock has shown little change, moving from around $165 in early January 2021 to $170 currently, while the S&P 500 index has seen a 45% increase over the same period. The performance of AMZN stock relative to the index has been tumultuous, with returns of 2% in 2021, -50% in 2022, and 81% in 2023, with underperformance in 2021 and 2022. Trefis High Quality Portfolio, on the other hand, comprising 30 stocks, has consistently outperformed the S&P 500 each year over the same period, offering better returns with less risk. Amid the uncertain economic landscape, the question remains whether AMZN will continue to underperform and face challenges similar to those in 2021 and 2022 or experience a significant upswing in the coming months.
In the second quarter, Amazon reported net sales of $148 billion, a 10% year-over-year increase, driven by a 19% rise in Amazon Web Services, followed by gains in North America and international segments. However, despite strong growth in AWS, it fell short compared to rival cloud businesses like Microsoft and Alphabet, which saw a 30% increase. The company also experienced intense competition in North America, impacting growth rates. Operating expenses as a percentage of revenues decreased in Q2, leading to an operating margin of 9.9% versus 5.7% in the previous period, with a nearly doubled net income of $13.5 billion.
In the first six months of FY2024, Amazon’s top-line grew 11% year-over-year to $291.3 billion, with all three segments – North America, International, and AWS – reporting growth. Operating income also improved significantly from $12.5 billion to $30 billion over the same period. However, the bottom line was partially offset by an increase in other expenses from $382 million to $2.7 billion, resulting in a 141% rise in net income to $23.9 billion. Looking ahead to Q3 2024, Amazon expects revenues to range between $154 billion to $158.5 billion, with a projected revenue for FY2024 estimated at $634.3 billion. A potential improvement in adjusted net income margin and a P/S multiple of under 3.5x could lead to a valuation of $210 for the company.
In conclusion, Amazon’s recent stock performance has been influenced by its second-quarter results and weak guidance for Q3, along with broader economic concerns. Despite facing competitive challenges in segments like cloud services and North America, the company has shown growth in revenue and operating income in the first half of FY2024. With expectations for continued revenue growth and improved net income margins, Amazon remains poised for potential valuation growth in the future. Investors and analysts will closely monitor the company’s performance and strategy in the coming months to assess its ability to navigate the evolving economic landscape and deliver value to shareholders.
