Amazon Stock: Alexa Has Issues, But Is Fundamentally Undervalued

Amazon Stock

Amazon Stock (NASDAQ:AMZN)

The largest e-commerce company in the world is Amazon (NASDAQ:AMZN), a tech giant. Amazon was founded by Jeff Bezos with an emphasis on “experimentation” and a readiness to take “bold risks.” Yet, not all of Amazon’s “bets” have been profitable (or successful). Examples include the Amazon Fire Phone, Amazon Tickets, and Amazon Destinations, a service for booking hotels that launched in 2015 and shut down less than 6 months later. Many might refer to these endeavors as failures, but Michael Jordan, a well-known basketball player, claimed, “I’ve missed more than 9,000 shots,” adding, “I’ve failed again and over, which is why I succeed.” Because Bezos has stated in interviews that “one success can make up for dozens and dozens of failures,” I believe Amazon is a strong illustration of this concept. 

A wonderful illustration of huge success is Amazon Web Services (AWS). With revenue of $5.2 billion in Q4’22, it quickly expanded to become the leader in cloud infrastructure and Amazon’s primary revenue stream. Up to 18,000 workers will lose their jobs, according to Andy Jassy, the new CEO of Amazon. Over 2,000 employees in Amazon’s hardware group have already been let go as a result of the employment layoffs, the majority of whom worked on the Alexa project. Is Alexa again another “failure” for Amazon, or is its potential being undervalued by the market? I’ll go through these specifics in this article before I discuss stock valuation and how I analyze technical charts. Let’s get going.

What Does the Future of AI Hold, Alexa?

In 2014, Amazon released the Alexa software and Echo. (hardware component). The Starship Enterprise’s computer voice system served as the inspiration for the original concept of the product. What began as a straightforward “smart speaker” had great intentions for Jeff Bezos. He desired it to emerge as a brand-new platform for interpersonal communication. This would imply that customers might use their voices to place orders at various businesses, like Amazon and Domino’s Pizza (DPZ).

According to a report from 2021, Alexa has a 69% market share and has established herself as the “dominant” player in the market for smart speakers. Amazon hasn’t provided a detailed breakdown of the number of Alexa (Echo) devices it sold in 2021, but estimates place that number at 65 million. Amazon said that the number of Alexa users increased by more than 30% in 2022, and the FT confirmed this. Also, more than half of Alexa users utilize her for shopping.

You can assume that Alexa and the Echo gadgets are a success as a result. That’s not it, no. The “Worldwide Digital Group” of Amazon, which also contains Prime Video, incorporates Alexa. According to Business Insider, confidential data revealed that the activities of this subsidiary suffered a startling $3 billion loss in the first quarter of 2022. Also, it was anticipated that the hardware division will lose $10 billion in 2022, with Alexa being to blame for “the great bulk” of those losses. If these calculations are accurate, Amazon would have generated a handsome profit of more than $6.

An Amazon marketing representative reportedly stated, “Our intention wasn’t to generate money off of Alexa,” according to The Financial Times. David Limp, who oversees Amazon’s hardware, reaffirmed this in an interview with CNBC. We strive to sell our items at break-even prices or somewhat higher, he continued.

The goal of the Echo and Alexa products was to encourage daily Amazon shopping behavior, which was thought to benefit the corporation as a whole. It has been challenging to assess the effectiveness and direct benefit of this approach, according to two people who are familiar with the situation.

Because of this, it appears that Amazon’s Alexa program has had a lot of trouble making money. It’s fantastic to engage in these low-margin (or no-margin) activities when things are going well, but when investors desire profits, these programs are scrutinized more carefully.

Are AI Chatbots Resurrecting?

Microsoft’s CEO Satya Nadella recently referred to the first generation of AI chatbots, including Siri, Alexa, and even Cortana from Microsoft, as “dumb as a rock.” He believes that the next wave of chatbots powered by artificial intelligence is about to take over. Being the fastest-growing app ever, ChatGPT spread like wildfire and is difficult to dispute. In order to compete with Google search for the first time in decades, Microsoft invested $10 billion in ChatGPT and incorporated it to its Bing search engine. It might be Alexa’s final death knell if Microsoft gives ChatGPT a speech interface. However, keep in mind that Alexa is also a conversational agent that is “AI-powered” and a pioneer in the field of natural language processing. However, if Amazon maintains the ability to “create” and leverages its enormous AI power (as the largest infrastructure provider in the world) to enhance and possibly rebrand Alexa, Alexa may make a comeback.

Financial Outlook and Valuation

I went into great detail regarding Amazon’s fourth-quarter earnings in my previous post. Here is a brief summary and my forecast for future growth.

Amazon’s revenues for the fourth quarter of 2018 totaled $149.2 billion, $3.43 billion more than analysts had projected and an increase of 8.59% from the same period in 2017. The US dollar’s strength in comparison to most other currencies resulted in a foreign exchange rate headwind of 3%, or $5 billion, which had a negative impact on its sales growth. While the US dollar has fallen in value relative to the majority of other currencies since October 2022, it is a good thing that currency markets operate in cycles. As a result, I believe that in 2023 exchange rates will have less of an impact. According to my model, 2023 will see 7% growth overall (designated as “next year”). This is based on my annual projection using the top end of management’s estimate (for Q1’23). I opted for the higher end because some economists believe that the U.S. recession may begin later than anticipated and that it may not be as severe as many people believe because inflation is still declining. 15% each year, in my opinion, will be the growth rate from years two through five. I believe this will occur because the e-commerce business will rebound as the economy as a whole improves. Also, I anticipate that AWS will maintain its strong 20% growth rate, which is the same as the segment’s $21.4 billion in Q4 2018 sales.

The fact that Amazon doesn’t generate enough revenue is a weakness. The company reported an operating income of $2.7 billion in Q4’22, a 21% year-over-year decline. The earnings per share (EPS) was $0.03, which was $0.313 below the required level. The majority of Amazon’s expenses for the quarter appear to be “one-time” expenses, which resulted in a startling $2.7 billion surge in additional expenses. There are specifics regarding the price of operating leases, insurance, and payments made to former employees. As AWS is already very successful (its operating margin is 24%), I believe that the majority of these costs will only be temporary. As a result, AWS should benefit from this in the long run by making even more money. For the next ten years, I predict that the operating margin will be 13%. My efforts in R&D, which have caused the operating margin to increase from 2.48% to 6.32% by 2022, have contributed to this.

These factors lead me to believe that $117 per share is a reasonable price. Amazon stock was almost 49% undervalued at the time this article was written because it was trading for $94 per share. So, I believe the stock is close to the “deep value” zone if the projected statistical results hold true.

Amazon also has a price-to-sales ratio of 1.7, which is considerably lower than huge technology companies and even smaller e-commerce businesses like Etsy (NASDAQ:ETSY), and is nearly 49% below its five-year average.

As many analysts, as was already mentioned, anticipate a recession in 2022, I wouldn’t be surprised if the inflationary environment led to a decline in e-commerce demand and an increase in fulfillment costs.

Bottom Line

Amazon has a strong culture of “experimenting” and “innovating,” and Amazon is the market leader in online purchasing. The organization is struggling as a result of how the economy is doing generally. The Alexa project appears to have been most negatively impacted by the recent layoffs, and money is being squandered on it. If ChatGPT featured a speech interface, it might also lose market share. Yet, since Alexa is also based on AI through natural language processing (NLP) and Amazon is the largest cloud infrastructure provider (which includes AI environments), the conflict is far from ending. Amazon’s cloud business is still expanding swiftly and is prepared to benefit from industry development trends like “digital transformation.” Amazon stock is cheap, both on its own terms and in comparison to its historical multiples, according to my valuation model and forecasts. As a result, it might be a wise long-term investment.

Featured Image: Unsplash @ Daniel Eledut

Please See Disclaimer

About the author: Stephanie Bedard-Chateauneuf has over four years of experience writing financial content for various websites. Over the years, Stephanie has covered various industries, with a primary focus on consumer stocks, cannabis stocks, tech stocks, and personal finance. This stock lover likes to invest for the long-term. Stephanie has an MBA in finance.