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Should Investors Buy Amazon Stock After Its Recent Drop?
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Amazon (AMZN - Free Report) is down roughly 15% since its third quarter report last week. The company missed earnings expectations by –9% at $0.20 per share as operating costs and a challenging business environment continued to trouble its top and bottom lines. The big tech giant is now 51% from its highs seen last November.
The prescient decline throughout the year might set up a better entry point for longer-term investors. After a 20-1 split in June, AMZN is now trading under $100 a share after routinely trading over $2000 per share and is more attractive from a valuation standpoint after the recent selloff.
The majority of Amazon’s sales are derived from retail but Amazon Web Services (AWS) has been its most profitable segment. Investors must pay close attention to this segment in addition to the outlook and valuation of the company before they make their decision on Amazon stock.
AWS Growth
During the third quarter, AWS revenue was up 27% to $20.5 billion but it fell slightly below expectations as shown in the nearby chart. Wall Street has been concerned that AWS expansion may be slowing as both Alphabet (GOOGL - Free Report) and Microsoft (MSFT - Free Report) have started to narrow the gap on the industry leader. Amazon’s AWS growth during Q3 was more than Microsoft’s Azure but less than Alphabet’s Google Cloud.
Image Source: Zacks Investment Research
AWS is still estimated to control the majority of the cloud-computing market share but there is increasing competition in the space from Oracle (ORCL - Free Report) and Snowflake (SNOW - Free Report) outside of the other big tech giants.
During Q3 Amazon brought in $2.5 billion in operating income, down 49% year over year from $4.9 billion in Q3 2021. However, AWS segment operating income was still up at $5.4 billion. This helped the company tally $2.9 billion in net income during Q3 which was still down from $3.2 billion in Q3 2021 leading to another earnings miss and the stock plummeting.
Outlook
Year over year, AMZN earnings are now expected to decline to an adjusted loss of -$0.02 from $3.24 per share in 2021. FY23 earnings are expected to bounce back to $1.74 per share, likely reflecting Amazon’s ability to adapt to the challenging operating environment.
Earnings estimates have largely gone down for this year and FY23 since Amazon reported Q3 earnings. But sales are projected to be up 9% this year and rise another 11% in FY23 to $566.63 billion.
Performance & Valuation
Amazon stock appears to be reaching oversold territory. AMZN is now down -44% YTD, worse than the Nasdaq’s -33% decline and the S&P 500’s -20%. However, over the last decade, AMZN is still up an impressive +720% to crush the Nasdaq and the benchmark.
Image Source: Zacks Investment Research
Trading around $92 per share, AMZN has a P/E of 104.5X. This is much higher than the industry average of 22X. However, Wall Street has historically been willing to pay a premium for AMZN’s stock. AMZN also trades a lot lower than its extreme high of 8,055.3X over the last decade and below the median of 132X.
Amazon’s price to sales have also become more reasonable, currently at 1.9X and below its P/S high of 5.3X over the last decade and the median of 3.1X. This is also nicely below the 3.5X P/S average for the benchmark at the moment.
Image Source: Zacks Investment Research
Bottom Line
Amazon currently lands a Zacks Rank #3 (Hold) and its Internet-Commerce Industry is in the top 26% of over 250 Zacks Industries. Despite the downward estimate revisions for the current quarter, Fiscal 2022, and FY23 the recent selloff has made the stock even more attractive relative to its past. At current levels, investors who hold the stock could be rewarded despite the near-term headwind. The average Zacks Price Target suggests 69% upside.
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Should Investors Buy Amazon Stock After Its Recent Drop?
Amazon (AMZN - Free Report) is down roughly 15% since its third quarter report last week. The company missed earnings expectations by –9% at $0.20 per share as operating costs and a challenging business environment continued to trouble its top and bottom lines. The big tech giant is now 51% from its highs seen last November.
The prescient decline throughout the year might set up a better entry point for longer-term investors. After a 20-1 split in June, AMZN is now trading under $100 a share after routinely trading over $2000 per share and is more attractive from a valuation standpoint after the recent selloff.
The majority of Amazon’s sales are derived from retail but Amazon Web Services (AWS) has been its most profitable segment. Investors must pay close attention to this segment in addition to the outlook and valuation of the company before they make their decision on Amazon stock.
AWS Growth
During the third quarter, AWS revenue was up 27% to $20.5 billion but it fell slightly below expectations as shown in the nearby chart. Wall Street has been concerned that AWS expansion may be slowing as both Alphabet (GOOGL - Free Report) and Microsoft (MSFT - Free Report) have started to narrow the gap on the industry leader. Amazon’s AWS growth during Q3 was more than Microsoft’s Azure but less than Alphabet’s Google Cloud.
Image Source: Zacks Investment Research
AWS is still estimated to control the majority of the cloud-computing market share but there is increasing competition in the space from Oracle (ORCL - Free Report) and Snowflake (SNOW - Free Report) outside of the other big tech giants.
During Q3 Amazon brought in $2.5 billion in operating income, down 49% year over year from $4.9 billion in Q3 2021. However, AWS segment operating income was still up at $5.4 billion. This helped the company tally $2.9 billion in net income during Q3 which was still down from $3.2 billion in Q3 2021 leading to another earnings miss and the stock plummeting.
Outlook
Year over year, AMZN earnings are now expected to decline to an adjusted loss of -$0.02 from $3.24 per share in 2021. FY23 earnings are expected to bounce back to $1.74 per share, likely reflecting Amazon’s ability to adapt to the challenging operating environment.
Earnings estimates have largely gone down for this year and FY23 since Amazon reported Q3 earnings. But sales are projected to be up 9% this year and rise another 11% in FY23 to $566.63 billion.
Performance & Valuation
Amazon stock appears to be reaching oversold territory. AMZN is now down -44% YTD, worse than the Nasdaq’s -33% decline and the S&P 500’s -20%. However, over the last decade, AMZN is still up an impressive +720% to crush the Nasdaq and the benchmark.
Image Source: Zacks Investment Research
Trading around $92 per share, AMZN has a P/E of 104.5X. This is much higher than the industry average of 22X. However, Wall Street has historically been willing to pay a premium for AMZN’s stock. AMZN also trades a lot lower than its extreme high of 8,055.3X over the last decade and below the median of 132X.
Amazon’s price to sales have also become more reasonable, currently at 1.9X and below its P/S high of 5.3X over the last decade and the median of 3.1X. This is also nicely below the 3.5X P/S average for the benchmark at the moment.
Image Source: Zacks Investment Research
Bottom Line
Amazon currently lands a Zacks Rank #3 (Hold) and its Internet-Commerce Industry is in the top 26% of over 250 Zacks Industries. Despite the downward estimate revisions for the current quarter, Fiscal 2022, and FY23 the recent selloff has made the stock even more attractive relative to its past. At current levels, investors who hold the stock could be rewarded despite the near-term headwind. The average Zacks Price Target suggests 69% upside.