Amazon (AMZN) – Get a free report investors may have started 2023 with a different feeling than the bitter uncertainty they most likely felt at the start of 2022.
Last year, the stock market was widely expected to plunge amid the Fed’s interest rate hikes. The only question was: Could Amazon (primarily the almighty AWS) prove to be a recession proof company? Short answer: no. Long answer: 1 trillion times no.
Yet the sentiment in 2023 is the opposite. The company has bled enough and hungry sharks seem to believe the Seattle giant is trading at a discount with shares up 17% year-to-date.
This optimism begs the question: will Amazon’s fourth quarter (Q4) earnings release live up to its investors’ hopes? Or will there still be a small gathering before next fall?
Figure 1: Amazon Revenue Snapshot: Another Shot in the Dark?
Dave Sanders for The New York Times
AWS: a change in its business?
Microsoftit is (MSFT) – Get a free report recent quarterly results confirmed that the pace of growth in its cloud computing business, Azure, is slowing. The titan of Gate, the second-largest cloud provider, expects Azure to slow four to five percentage points in the first quarter of 2023.
If that’s any indication of what’s in store for Amazon Web Services (AWS), the world’s largest cloud computing company, investors shouldn’t set unrealistic expectations for Amazon’s growth.
Yet there is still an ounce of hope. Barrons Contributor Eric J. Savitz thinks Microsoft Azure will most likely shift its business model to a more traditional one, making it less vulnerable to economic downturns. If it works, AWS will most likely follow the same path.
“Microsoft is working with customers to optimize cloud spend, which in some cases means moving to more traditional long-term contracts and moving away from the traditional cloud-based consumption model. It also means that customers who stick to consumption-based models slow their usage growth as their own businesses slow,” Savitz wrote.
The consequences of the recession
Despite optimism about AWS’s business adaptability, recent news may confirm that Amazon’s fourth-quarter results will still be plagued by macroeconomic headwinds. Four weeks ago, Amazon laid off 18,000 workers, in a bid to cut costs.
Amazon went through a period of rapid expansion during the COVID pandemic, doubling the size of its retail network. According to Evercore ISI’s Mark Mahaney, the expansion added an additional 130 million square feet to Amazon’s footprint and cost $100 billion in cumulative capital expenditure — more than any other company during the period.
After such a rapid growth spurt, it seems almost “natural” that Amazon should cancel some of its investments. Rapid expansions are generally difficult to maintain and can easily collapse. Therefore, savvy investors should examine Amazon’s margins and watch for any signs of improvement.
Bullish bets
Bad signs or not, there will always be those complaining about the rain and those selling umbrellas. Of the 34 analysts covering Amazon stock, 30 rate it a “buy,” while the other four recommend it as a “hold.”
Credit Suisse’s Stephen Ju is the most bullish among Amazon bulls. He raised his price target on Amazon shares from $140 to $170, writing that the Seattle-based juggernaut is his top pick.
(Disclaimer: This is not investment advice. The author may own one or more stocks mentioned in this report. Additionally, the article may contain affiliate links These partnerships do not influence editorial content. Thank you for supporting Amazon Maven)