HJBC
Thesis
Amazon (NASDAQ:AMZN) is about to publish Q3 outcomes will on October 27, post-market. And in my view, the e-commerce large will very probably disappoint towards earnings. In accordance with knowledge compiled by Searching for Alpha, analyst consensus expects a 15.4% yr over yr and 5% quarter over quarter income progress. I merely don’t see that as probably. Given how sharply the macro-economic atmosphere has deteriorated, and reflecting on numerous bulletins from the e-commerce large (right here, right here), I imagine quarter over quarter income progress might battle to even be optimistic QoQ.
If my thesis is right, and Amazon will certainly disappoint, then AMZN inventory might face a pointy sell-off — as a result of many analysts nonetheless maintain on to the imagine that Amazon’s enterprise is considerably recession-proof.
Earnings Preview
In accordance with knowledge compiled by Searching for Alpha, as of October twentieth, 33 analysts have submitted their estimates for Amazon’s Q3 outcomes, that are anticipated to be introduced on October twenty seventh post-market.
Whole gross sales are estimated to be between $124.96 billion and $130.62 billion, with the typical estimate being $127.85 billion (versus Amazon’s steerage vary of $125.0 billion and $130.0 billion). PS: notice how analyst consensus completely aligns with Amazon’s steerage vary.
If an investor would assume the consensus common because the anchor, Amazon’s Q3 gross sales are estimated to develop by about 15% as in comparison with the identical quarter in 2021, and develop 5% as in comparison with Q2 2022.
Amazon’s Q3 EPS estimates are between $-0.05 and $0.39. The typical is $0.2.
Though analyst’s income estimates have clearly flattened versus the identical estimates from a yr in the past, actually they’ve considerably decreased, I imagine consensus is excessively optimistic – as I argue within the following part.
Searching for Alpha
Further Prime Day Is A Warning Sign
To get issues into the right perspective, I want to level out that Amazon’s e-commerce gross sales, which account for greater than 50% of the conglomerate’s revenues, have stealthy declined for the previous 2 quarters. Within the newest June quarter, e-commerce gross sales have been down by about 4.3% yr over yr.
For my part, it is vitally probably that with Q3 Amazon will add a 3rd consecutive quarter of falling revenues – merely as a operate of a sharply deteriorating macro atmosphere and falling client sentiment.
The thesis is unquestionably supported by Amazon’s sudden announcement to push an unprecedented second Prime Purchasing Day into This fall. As for any firm – and Amazon must be no completely different – a gross sales promotion is extremely probably a warning sign that an organization is combating towards disappointing analyst’s and investor’s income expectations.
However the further Prime Day promotion, which ought to add about $4 billion of further revenues will solely materialize in This fall outcomes, not Q3.
Price Pressures Are Actual
Whereas Amazon’s topline is probably going challenged by an financial slowdown, the corporate’s value pressures are actual. In Q2, Amazon’ working bills have jumped already by 11.9% yr over yr, to $117.9 billion. However the inflationary pattern has very probably continued all through Q3.
Amazon’s not too long ago introduced hiring freeze might spotlight that the times of super-charged progress could also be over. Admittedly, many corporations – together with the FAANG’s – have introduced hiring freezes, worker lay offs and extra HR self-discipline. However Amazon’s 1.5 million worker sturdy enterprise mannequin stands out as significantly human useful resource intensive. Any smaller wage inflation will translate into materials margin strain. Furthermore, a capital-intensive logistic community actually doesn’t assist to alleviate inflationary value pressures. Notably, in accordance with analyst Marc Wulfraat, Amazon has already scaled again on operations and/or growth for 66 U.S. logistic services.
The important thing query for Q3 is: what has materialized quicker – Amazon’s inflationary pressures or the corporate’s (profitable) restructuring efforts? I’d argue the previous prevails, provided that the latter is a ‘response’ motion of the previous (with an unsure success fee).
Valuation Nonetheless Stretched
So, analyst consensus estimates are bullish, whereas numerous knowledge signifies the opposite. This makes an earnings disappointment very probably. The subsequent query now could be: is Amazon inventory weak to the frustration? Sure, in my view.
Buyers ought to think about that, regardless of a 30% sell-off YTD, Amazon inventory remains to be valued at a one-year ahead EV/EBIT of x83, and EV/Gross sales of x2.4. As in comparison with Walmart being priced at x17.7 EV/EBIT and x0.7 EV/Gross sales respectively.
Searching for Alpha
As I perceive that multiples may not present an correct valuation reference, here’s what I’ve beforehand calculated for Amazon’s relative a number of evaluation, sum-of-the-parts-valuation and residual earnings framework.
My earlier Amazon article:
In accordance with the relative a number of comparability, Amazon’s truthful valuation must be roughly $90/share. My residual earnings framework returns a base-case goal worth of $84.55/share. The sum-of-the-parts valuation boils all the way down to a key query, particularly, if Amazon’s retail enterprise is price greater than Walmart’s?
Dangers
There are two dangers to level out. First, betting towards Amazon is infrequently a sensible transfer – or not less than it has not been up to now. Regardless of the shot-term headwinds Amazon stays among the best managed corporations on the planet, and the long-term outlook for the e-commerce large stays shiny. Second, traders ought to think about that Amazon incessantly misses earnings estimates (much less so revenues) and the market doesn’t very a lot care. Arguably, Amazon has taught its traders to look previous short-term accounting and profitability targets. And accordingly, the (anticipated) earnings miss might fail to materialize a inventory sell-off.
Conclusion
I’m nervous about Amazon’s Q3 quarter. I believe the e-commerce large is going through unreasonably excessive expectations. And accordingly, a disappointment is probably going – which might are available in type of a missed Q3 income or earnings goal, and/or in type of a disappointing full yr outlook.
Given Amazon’s stretched valuation, I imagine an earnings disappointment is not going to be taken ‘properly’ by the investor group. As a consequence, I like to recommend to scale back publicity to AMZN inventory going into Q3 outcomes.
