Amazon: It Could Get Ugly (NASDAQ:AMZN)

All eyes will be on Amazon.com, Inc. (NASDAQ:AMZN) when reporting the fourth fiscal quarter results after the market closes tomorrow, February 2. The currently prevailing recessionary environment has weighed on the results of e-commerce companies across the globe. world, and investors would be eagerly waiting to see how Amazon’s revenue is affected as well. But in addition to tracking the e-commerce giant’s headline sales figure, investors may also want to monitor its segment revenue, Amazon Web Services (“AWS”) growth rate, profitability profile, and its prospects. administration for next year. These articles will better highlight Amazon’s near-term prospects and are likely to dictate where its actions go next.

growth fluctuations

Let me start by saying that Amazon’s higher-ups have done an excellent job growing their business thus far. Its revenue has increased by almost 700% in the last decade and continues to grow with each passing year. This is truly a commendable feat and an enviable position to be in. But with credit given where it’s due, there’s a good chance that Amazon’s growth will stall in the near future, given the current recessionary environment and spending cuts taking place around the world. .

For the record, Amazon classifies its revenue into three reportable segments, namely North America, International, and AWS. The first two segments are made up of revenue generated through e-commerce activities and subscriptions earned in domestic and foreign markets, and tend to perform well during the holiday season that falls in Q4. But with interest rates having skyrocketed around the world and consumer budgets coming under pressure of late, the seasonal uptick we typically see in the fourth quarter may be limited. Therefore, I estimate that Amazon’s North American and International segments will post sequential revenue growth of 15% each during the fourth quarter.

The third segment, which is Amazon Web Services, has been the shining star in the company’s growth story, but is likely to see a slowdown in sales this time around. Its closest comparable, Microsoft (MSFT) Azure, published an important decelerate in its pace of revenue growth during the quarter, as companies around the world have begun to slash their discretionary spending in a bid to be financially frugal. Since this is an industry dynamic, I believe Amazon’s AWS will experience similar headwinds, with its revenue growth slowing to 1% sequentially and 16.7% year-over-year.

These projections lead us to an Amazon revenue estimate of $143.3 billion for the fourth quarter. This figure is coincidentally within the range of Street of dear, currently ranging from $140.14 billion to $148.25 billion for the quarter. But with that said, also pay close attention to Amazon’s management outlook for the coming year. Everyone from the IMF, analysts to big banks have a different view on the macro environment in CY23. So look for clues as to what Amazon’s view is on the same, and when they expect revenue growth to pick up in the future. I think this will be another key element influencing investor sentiment in the coming weeks.

Impact on Profitability

Going on, although Amazon has been an immensely profitable company over the years, I argue that its profitability will take a drastic hit during the fourth quarter.

Note in the chart below that two of the three reporting segments have already posted operating losses. The company is expanding its operations internationally and has yet to unlock economies of scale, which is one of the main reasons its international segment has posted staggering operating losses and will likely plateau sequentially in the fourth quarter. The North America segment could also post sequentially flat operating losses, due to the absence of major catalysts that would change the status quo. However, the drop in AWS revenue growth momentum, while its investments remain high, is likely to reduce operating profit for the segment and the company as a whole in the fourth quarter.

Second, the company owned approximately 158 million Class A shares of electric vehicle maker Rivian Automotive, Inc. (RIVN) as of September 30, 2022. This was a really smart investment at the time, considering that Amazon can strategically replace and expand its fleet of delivery vehicles with these electric vehicles to reduce fuel expenses. But the problem is that Rivian’s share price has been falling like a rock, which will inevitably drag down Amazon’s profitability.

See, Amazon has an item called “Other Income” on its income statement that includes gains or losses from marketable securities. On June 30, 2022, when Rivian’s stock price was $25.4 each, Amazon’s equity investment in the company had a fair value of $4.1 billion. But by September 30, 2022, Rivian’s share price rose to $32.9 each, and the value of Amazon’s equity investment in the company rose to $5.2 billion. As a result of these paper gains, Amazon posted a $1.1 billion increase within “Other Income,” which lifted the e-commerce giant’s overall net income.

since his last presentation 10-Q:

Included in other income (expense), net is a marketable equity valuation gain (loss) of $1.1 billion in the third quarter of 2022…from our equity investment in Rivian Automotive, Inc. (“Rivian “)

In other words, Amazon’s net income would have been about $1.1 billion lower (before taxes) in the third quarter if it had not recorded these earnings on paper. But the problem now is that Rivian’s stock had a closing price of $18.43 as of December 31, 2022, the day Amazon’s fourth quarter likely came to a close. So, by my estimates, the e-commerce giant’s investment in Rivian had a fair value of $2.87 billion as of December 31, 2022, and will reduce its other revenue, as well as net income, by $2. .33 billion during the fourth quarter. This number may not mean much on its own, but it’s actually comparable to Amazon’s total net income of $2.87 billion last quarter.

Therefore, due to the factors mentioned above, I estimate that Amazon’s net income will take a hit in the fourth quarter and the e-commerce giant will post a net loss of approximately $200 million in said quarter. But with that said, it’s surprising that rarely anyone talks about the Rivian effect when assessing Amazon’s fourth-quarter results.

final thoughts

As far as the fourth quarter is concerned, Amazon is likely to post net income and loss close to $143.3 billion and $200 million, respectively. Investors unaware of Rivian and how it will impact Amazon’s finances could be in for a rude awakening when they see the e-commerce giant’s net income plummet during the fourth quarter. Therefore, investors with a short-term time horizon may want to prepare for an ugly quarter.

Having said that, Amazon shares are trading at 2 times the company’s last twelve month sales. This is quite low when viewed in conjunction with industry comparables. Many of the other e-commerce platforms are trading at much higher multiples or have much lower levels of revenue growth. This leads me to believe that Amazon stock is already pricing in many of the risks and offers an attractive price point for investors with a multi-year time horizon. Therefore, I think that Amazon stock is a good long-term buy, despite the short-term risks that lie ahead. Good luck!