Amazon Stock (NASDAQ:AMZN)
Being overweight can cause health problems, so most people who gain too many pounds end up making significant changes. Companies in the corporate sphere might face a similar predicament when their spending bases become bloated. On Monday, tech and retail giant Amazon.com, Inc. (NASDAQ:AMZN) announced yet another round of layoffs, with the goal of resuming operations.
Because of the pandemic, Amazon’s workforce has more than doubled. Not only was the firm hiring more warehouse workers as a result of the online shipping boom, but Amazon Web Services (AWS) saw its revenues continue to rise. But, as growth has finally begun to slow in recent quarters, the company has been unable to keep expenses in check, resulting in substantial margin compression.
Amazon revealed in its annual results last year that its entire operating income had been cut in half. The bottom line was significantly worse, moving from a large net profit of more than $33 billion to a few billion loss. Nevertheless, looking at the bottom line can be more difficult due to the massive write-downs the business has taken on its investment in Rivian Automotive, Inc. (NASDAQ:RIVN). The electric vehicle manufacturer’s shares have been hitting new lows virtually regularly as its earnings have fallen short of forecasts in most quarters.
Indeed, Amazon’s retail division did poorly in 2022, especially when overseas income fell slightly. Despite its ongoing revenue growth, Amazon was unable to completely offset the drop in operating profits. Indeed, AWS reported a year-over-year reduction in operational income dollars for Q4 2022, which is presumably why it is included in this round of layoffs. The Q4 2022 AWS operating margin of 24.3% was the first figure below 25% since the first half of 2017.
Amazon does not need to considerably boost margins to increase its segment operating income. Even maintaining your operating margin % will boost your operational income dollars as your business grows. We’ve seen AWS operating margins grow sequentially from Q4 to Q1 every year since the epidemic began, so it’ll be interesting to see if that trend continues this time.
With the price so low right now, Amazon shouldn’t have to worry about any more Rivian write-downs, so maybe the bottom line will be back on track shortly. Analysts expected nearly $5 in earnings this year in the summer of 2021, but predictions now call for less than $1.50. Estimates have fallen in the last two quarters, as seen in the table below, although the declines have begun to level out. Future year numbers have even risen recently, and we may see some greener as a result of the current job cutbacks announcement.
Analysts and investors will also be interested to see if Amazon reduces its capital spending this year. Last year, the company spent more than $63.6 billion on property and equipment, up from $13.4 billion in 2018. In certain ways, you have to spend to expand, yet the company’s revenue increase was nowhere near the amount that expenditure climbed in percentage terms.
I brought up the capital spending situation approximately a year ago because it was clearly affecting the company’s balance sheet. Earlier this year, Amazon entered into a term loan agreement that could offer up to $8 billion in additional liquidity. We’ve seen the corporation access the debt markets in recent years, particularly as its free cash flow fell during the most recent investment cycle. Net cash has actually gone negative in recent quarters, as shown in the chart below, but it did increase sequentially in Q4 almost back to the flat line.
Amazon isn’t in financial problems right now, but you don’t want to be in too much net debt if you don’t have to, as that can impair your income statement chances in the long run. Raising profits and maintaining constant capital expenditures can help in this area, therefore free cash flow will be the most significant metric to monitor in 2023. Amazon is also in a situation where any future high-profile acquisitions may need to be stock-based rather than cash-based, and shareholders may not welcome any dilution.
Amazon shares have recovered admirably from their recent lows, albeit they remain significantly lower than where they were a year or two ago. The average price objective on the street is $138, implying a 40% increase from Monday’s finish. Analysts continue to be quite bullish on the stock, with almost all of the ratings being a buy or a strong buy. In comparison, the typical objective is down about $70 in a year. More crucially, Amazon stock is barely above its 50-day moving average, which might act as support if this trend line breaks.
Bottom Line
I’m hesitant to recommend investing in Amazon stock right now. There are many economic concerns out there right now, which may cause some sales headwinds, and AWS revenue growth is decreasing in percentage terms. A rate hike by the Fed this week could be negative for the broader market, especially if it results in a stronger US dollar, which would damage Amazon’s performance once more. For the stock to become a good buy, I’d like to see that the layoffs have a positive influence on the total cost basis and that the free cash flow situation is improving.
Finally, Amazon.com, Inc. is making the necessary actions to get its bottom line moving in the right direction again. Whatever happened with the firm’s Rivian investment, Amazon’s operating profits dropped significantly last year. Even AWS, the crown jewel, witnessed a profit drop in late 2022, with the lowest operating margin percentage in more than 5 years. Yet, this may not be the final round of layoffs, and it will be interesting to watch if Amazon.com, Inc.’s capex and cash flow condition can improve for more than a single quarter.
Featured Image: Unsplash @ Piotr Cichosz
