Amazon Stock: Buy This Pullback (NASDAQ:AMZN)


Exterior view of the Amazon Logistics delivery agency in Velizy-Villacoublay, France

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Thesis

It has been a busy quarter for Amazon.com, Inc. (NASDAQ:AMZN), with a series of acquisitions primed to further its engagement with consumers and tap other growth drivers. Following its deal to acquire One Medical (ONEM), it then snapped up iRobot (IRBT), as CEO Andy Jassy & Co. moved quickly to enhance its ability to collect more data about its consumers.

However, the momentum has been hampered recently, as WSJ reported that CVS Health Corporation (CVS) is the leading contender to acquire Signify Health (SGFY) after losing the bid to buy One Medical to Amazon earlier. Furthermore, the FTC is also investigating Amazon’s deal to acquire One Medical, which could delay the deal’s completion.

Investors are urged to pay close attention to Amazon’s forays into the healthcare space as Jassy looks to spruce up new growth areas quickly to accelerate Amazon’s growth momentum. The company has also been improving its operational efficiencies after its rapid growth in fulfillment capacity over the past two years. Therefore, we believe the company recognizes the criticality of recovering its profitability while driving growth in newer segments to placate investors, as its margins profile fell markedly.

AMZN remains more than 30% below its all-time highs, although it has recovered markedly from its May lows. We noted in our previous article that AMZN had likely formed its medium-term bottom in June and is unlikely to breach that level.

Therefore, we believe the recent pullback from its August highs represents a potential opportunity for investors to consider layering in, as Amazon is on track to improve its growth profile and recover its profitability.

Accordingly, we revise our rating on AMZN from Hold to Cautious Buy, as we surmise there could still be downside volatility as the price action is not ideal.

Amazon Is Leveraging New Growth Drivers

The Information reported that the organizational changes in Amazon reflected the “hefty investment Amazon is putting into expanding its health services arm, which Jassy has made a top priority as he looks for gigantic new markets that could fuel the company’s growth.”

Therefore, investors shouldn’t be surprised with the rapid forays that Amazon has executed recently in the healthcare space as it seeks to rejuvenate its growth profile. Furthermore, The Information highlighted that Buy with Prime is a critical project that emerged from its secretive Project Santos unit to target Shopify’s (SHOP) competitive moat with the allure of its fulfillment capability.

A survey by Morgan Stanley (MS) highlighted that 73% of respondents cited Prime’s free two-day shipping as the primary reason for their decision to sign up. It’s also the most critical reason in the survey for the respondents, just ahead of Prime Video (58%). Little wonder that a recent report highlighted that Shopify has been “discouraging” its merchants from using Buy with Prime, citing a violation of its terms of service. It highlighted:

You have a code snippet on your storefront that violates Shopify’s Terms of Service. This script removes Shopify’s ability to protect your store against fraudulent orders, could steal customer data, and may cause customers to be charged the wrong amount. – Marketplace Pulse

Moreover, Amazon has also gone to great lengths to further the engagement with Prime members and drive new sign-ups. Its tentpole Lord of the Rings series will be carefully scrutinized within its S-team as Amazon dials up the appeal of its Prime membership. Therefore, we urge investors to pay attention to management’s commentary on metrics for Prime in its next earnings call, given the spate of developments over the past couple of months.

Amazon Is Also Cutting Costs To Improve Its Profitability

Amazon has made it clear that it’s focused on driving more efficiencies in its underlying business, given the rapid growth in its fulfillment and logistical capabilities over the past two years.

Therefore, we are not surprised that Bloomberg reported Amazon had shelved extensive plans for warehouse expansion. Moreover, Insider shared more details on Amazon’s new warehouse program, called “Amazon Warehousing & Distribution (AWD).”

Amazon has been attracting merchants to expand the scope of fulfillment to non-Amazon orders with AWD. The program is designed to offer merchants the ability to let Amazon handle fulfillment for slower-moving inventory at lower charges, capturing a larger slice of the fulfillment value chain. Therefore, we believe the company has been executing ideas with its warehousing capacity to reach out to more merchants in its bid to continue gaining share with its unrivaled fulfillment capability. Therefore, we believe that its efforts in leveraging its capacity successfully could rejuvenate its operating leverage, which has suffered tremendously with the normalization of e-commerce growth.

Amazon revenue change % and EBIT change % consensus estimates

Amazon revenue change % and EBIT change % consensus estimates (S&P Cap IQ)

The consensus estimates (very bullish) indicate that Amazon’s revenue growth profile should reach a bottom in FY22 before recovering through FY26. While the growth cadence is expected to be much slower than its pre-COVID years, we believe there’s scope for upside surprises, as discussed earlier.

Amazon FCF margins % consensus estimates

Amazon FCF margins % consensus estimates (S&P Cap IQ)

In addition, Amazon’s free cash flow (FCF) margins are projected to improve markedly from the lows of FY22 as it further improves its operational efficiencies. Coupled with a highly profitable AWS and advertising, its resurgent retail business could underpin its margins profile moving forward, helping to sustain AMZN’s premium valuation.

AMZN’s Valuation Could Be Re-rated

AMZN NTM EBITDA multiples valuation trend

AMZN NTM EBITDA multiples valuation trend (Koyfin)

AMZN last traded at an NTM EBITDA multiple of 17.3x and an NTM normalized P/E of 77.5x. While it still traded at a premium, we noted that the market has consistently supported AMZN at valuations close to the zone it found robust support in June.

As seen above, AMZN traded below the two standard deviation zone below its 10Y mean in June. Therefore, we are confident that the market remains confident of AMZN’s execution. As a result, the recent pullback from its August highs should be regarded as a healthy retracement, offering investors a less aggressive entry zone.

Is AMZN Stock A Buy, Sell, Or Hold?

AMZN price chart (weekly)

AMZN price chart (weekly) (TradingView)

AMZN has fallen about 14% since its August highs. But, we are confident that the bear trap (indicating the market denied further selling downside decisively) in June should undergird the recovery of AMZN’s medium-term bullish bias.

While the price action is not ideal, we believe AMZN’s entry level has been de-risked sufficiently for investors to consider adding more positions.

As such, we revise our rating on AMZN from Hold to Buy.



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Post Author: Adam Jacob

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