The forces of economics are catching up with AMZN. First and foremost its businesses, including the cloud services (AWS), face stiff demand headwinds as the global economy sinks further into the abyss of recession. Second, AWS’ gilded veneer is peeling away as its growth rate recedes and its margins contract. Finally, the Company as a whole has been adversely affected by soaring costs, which can be covered over with accounting games while revenues are growing quickly but which rear their ugly when the economy heads south.
I think AMZN’s share price has at least another 50% downside from the current level. The analysis below is from the latest issue of my Short Seller’s Journal:
AMZN’s stock price plunged as much as 19% after hours Thursday (10/27) after reporting horrific Q3 numbers (it finished the after hours session down 12.6%) . Though the GAAP EPS “beat” estimates, revenues missed estimates and AWS sales growth was nearly 500 basis points lower than expected (27% YoY vs 31.9% forecast by the Street). The total revenue growth rate was the slowest in over 20 years. The Company also guided to Q4 revenues that were well below the Street estimate ($140 to $148 billion vs $156 billion expected).
While the revenue growth rate was much slower than expected, costs soared. And though the gross profit rose slightly (probably from GAAP accounting games), the cost of fulfillment jumped from 33.5% to 34.5% of Product sales (e-commerce + Whole Foods, primarily). As a whole, operating expenses soared while the operating profit margin plunged to 1.7% from 4.3% in Q3 2021.
AMZN’s Product Sales generated a $2.87 billion operating loss ($412mm in North America and $2.46 billion in International). AWS’ (cloud computing services) revenue growth rate slowed considerably. AWS’ operating margin dropped to 26% from 30.3% in Q3 2021. AMZN’s P/E multiple will rapidly decline if AWS’ growth rate continues to slow and its margins continue to contract. AWS is 16% fo AMZN’s revenues but it is the reason that AMZN sports a P/E ratio of 92 and a forward P/E of 56. The market will have to reassess the multiple it is willing to pay with AWS’ growth rate slowing and likely to slow more going forward (AMZN announced a hiring freeze at AWS two weeks ago).
I think the easiest money shorting AMZN has been made. However, it hit a low of $80 in March 2020 (down 22% from Friday’s close) and it hit low of $67 in the late 2018 market sell-off (down 35% from Friday’s close). With these levels as potential downside targets when the stock market rolls over again, it’s worth tracking AMZN and shorting it or buying longer-dated OTM puts if it rallies back to the $110-$120 range.