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AMAZON Amazon Is What Worries Me About The Economy ... Amazon.com, Inc. (AMZN)SP500135 
Amazon.com headquarters in Silicon Valley ... Sundry Photography/iStock Editorial via Getty Images Original article: https://seekingalpha.com/article/4506697-amazon-is-what-worries-me-economy Burgess COMMENTARY Peter Burgess | ||
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Amazon Is What Worries Me About The Economy ... Amazon.com, Inc. (AMZN)SP500135
Written by Victor Dergunov ... Author of The Financial Prophet. Diversified quality investment ideas for remarkably high returns May 04, 2022 10:36 AM ET Summary
This idea was discussed in more depth with members of my private investing community, The Financial Prophet. Learn More » The last time I wrote an 'Amazon Worries Me' article was in October 2018. We see many parallels from then, as the Fed is raising rates, growth is slowing, and bellwether companies like Amazon (NASDAQ:AMZN) are showing weakness. Moreover, we saw a correction developing in the Fall of 2018 that cultivated in a crash going into the new year. Possibly, the only reason why we did not see a recession in late 2018/early 2019 was that the Fed pulled a 180 on monetary policy and began easing instead of tightening further. Now Amazon is at it again, providing disappointing results and poor guidance. Moreover, it's not just Amazon, as many top companies are showing signs of strain due to high inflation, monetary tightening, slower growth, a softer consumer, and other factors. Due to the recent developments, Amazon is not a buy anymore, and I am considering selling my shares. Moreover, despite a high probability of a post-Fed rally, the stock market could see new lows soon. I suspect the next leg lower will bring the S&P 500/SPX (SP500) down to around the 3,500-3,800, and unless the Fed flips its stance on monetary policy, it could happen essentially at any time within the next six months. The Amazon Report While North American revenue came in at $69.2 billion vs. $64.4 billion a year ago, international revenue slipped by $1.8 billion ($28.8b vs. $30.6b). The company's cloud business expanded revenues to $18.4 billion from $13.5 billion a year ago. The company also reported $7.9 billion in ad revenues, slightly lower than the anticipated $8.2 billion figure. However, the good news ends there, as the company reported just $3.7 billion in operating income, vs. the $8.9 billion reported a year ago. Furthermore, its operating income came in at the lower end of its guided range of $3-6 billion. Amazon's operating margin fell sharply on a YoY basis from 8.2% last year to just 3.2%. Moreover, TTM cash flow decreased to an outflow of $18.6 billion compared to an inflow of $26.4 billion last year. The company guided to revenues of $116-121 billion for Q2 vs. $125.1 billion consensus and operating income of -$1 to $3 billion. Income Statement Amazon Q1 Income statement Income statement (Seeking Alpha) We see that Amazon's financials have deteriorated some compared to last year. Revenue growth expanded at only about 7% YoY, its slowest pace in decades. Operating expenses grew by more than 13% YoY, illustrating higher costs due to inflation and other variables. As a result of the higher prices, operating income fell sharply. Moreover, Amazon recorded a massive $8.5 billion loss due to its Rivian (RIVN) investment. Therefore, net income went negative, and EPS came in at a significant loss. The Takeaway We see some of Amazon's numbers falling off a cliff here. First, the company's revenue growth is slowing down more than expected. This dynamic implies a broad economic downturn is here, and it will probably worsen. The consumer is softening and is not spending as robustly as anticipated. High inflation and tighter monetary conditions are two primary contributing factors to the consumer slowdown. Additionally, we see higher costs associated with rising inflation and other variables on the operating side of the equation. However, inflation will likely persist and should continue weighing on costs, margins, and income for Amazon and other market-leading companies. Earnings Revisions Amazon EPS revisions EPS revisions (Seeking Alpha) We've seen EPS estimates come in lately, and this trend of downward earnings revisions will likely continue. If we look at this year, Amazon may only earn about $5 in EPS, which is minuscule. However, if we look at 2023 consensus estimates, the company could bring in about $50-55 in EPS next year. So, we're looking at a stock trading at about 44-48 times forward EPS estimates. Revenue Estimates Amazon Revenue estimates Revenue estimates (Seeking Alpha) Many analysts expect Amazon's revenue growth to remain robust despite the sharp EPS slowdown. However, the company posted a 7% YoY growth number last quarter, and consensus estimates are for a 6% YoY growth in Q2. It is not easy to imagine that revenue growth will increase sharply to 16-18% YoY. Therefore, we could see lower revenue revisions in future quarters. Also, Amazon's intermediate-term growth rate is probably overly optimistic here. We may see 10-12% YoY growth in H2 2022/2023, but not likely the 15-20% growth that many analysts envision. Thus, Amazon's forward P/E of 44-48 times consensus EPS estimates may be too high here, and a P/E ratio closer to 30-35 implies a stock drop to $2,000 or lower for Amazon. It's Not Just Amazon Apple (AAPL) reported a strong quarter, but the company cited that supply chain constraints could hurt sales by $4-8 billion this quarter. Alphabet's (GOOG) (GOOGL) shares also slid as the company missed top and bottom line numbers recently. Netflix's (NFLX) stock cratered after the company reported its first quarterly subscriber drop in over ten years. Facebook (FB), despite reporting a better than expected quarter in Q1 (by some metrics), is dealing with its slowdown, higher costs, and lower profits. We see most tech leadership struggling to keep growth and profitability growth going here. Persistent high inflation, a tightening economic atmosphere, a softer consumer, and generally slower growth should continue weighing on revenues, margins, and profitability as we advance. Therefore, Amazon, the big-tech leadership, and the stock market, in general, will probably decline further in the coming quarters. The Bottom Line Amazon is not a buy here anymore, I see the company as a hold, and I may sell my Amazon position soon. The stock will become more attractive as it drifts closer to $2,000. I also want to remind you what happened the last time the economy was in an aggressive rate increase environment and Amazon and other bellwethers began to slip. Growth essentially ground to a halt in late 2018, and the stock market cratered (SPX by 20%). The primary reason why the economy did not go into recession and the stock market avoided a full-blown bear market is because the Fed switched its stance on monetary policy, stopped raising rates, and began easing again into 2019. One more thing you'll want to consider: SPX trend SPX (StockCharts) If we look at the 2018 decline, the setup is early, similar to what we see in today's chart. In 2018, the SPX fluctuated around the 10% correction mark before dropping by a complete 20%. Moreover, the SPX would have probably seen a much more significant decline if the Fed didn't flip on monetary policy. Now the situation is a bit more complicated. Many elements are similar, but the SPX is floating around a 15% correction now and is at risk of declining to the 3,500-3,800 support range. Moreover, we have high and persistent inflation now, a crucial factor that was not prevalent during the 2018 decline. Therefore, the Fed will have more difficulty switching monetary policy in the current cycle, but if it does, it will likely be behind the curve on the stock market. Thus, if the SPX falls through 4,000 support, it will probably experience an initial 20-28% decline (from the top) to the 3,500-3,800 support range. Furthermore, if the Fed does not switch to a more accommodative monetary stance, we could see further declines, possibly to the 3,200 level or lower in the SPX (bearish case scenario).
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