Look for Amazon to break out in 2022, this portfolio manager says

It’s been a while since we’ve seen any real fireworks from Amazon (Amazon Stock Quote, Charts, News, Analysts, Financials NASDAQ:AMZN), but just wait a while, says portfolio manager Gordon Reid, who thinks the company’s huge investments in R&D should pay off soon enough.

And so begins a new year for Amazon, the e-commerce giant which impressed early on in the pandemic but has been floating along for a good year and a half now, finishing 2021 up just two per cent. That’s in comparison to a gain of 21 per cent for the tech-heavy NASDAQ. And while investors have had to look to other FAANG names like Apple and Google to get their Big Tech fix this past year, Reid thinks this may be Amazon’s year.

“We think that the investments that they’re making are going to yield great results,” said Reid, CEO of Goodreid Investment Counsel, who spoke on BNN Bloomberg on Thursday where he nominated Amazon as one of his Top Picks for the year ahead. “You can see the formula that Amazon has employed over the last number of years. There’s a cadence to it.”

“They make huge investments — they have about $20 billion a year going into R&D — and so they make those investments and then they reap the benefits. What they’ve done in 2021, for example, is they’ve put a lot of money into new fulfillment centres which is going to increase their ability to deliver packages even faster,” he said.

“Andy Jassy has taken over from Jeff Bezos as the CEO. They hired about 275,000 more employees over the fourth quarter of 2021,” Reid said. “They will make about $70 a share but they’re growing at about 25 per cent per year, so they’re going to grow into their valuation very, very quickly. We’re quite excited about Amazon.”

Amazon’s relatively poor showing in 2021 likely had a lot to do with tough year-over-year comps, where the company’s incredible 2020 growth spurt was hard to live up to, especially considering that its online retail business got dented by a return by shoppers to bricks and mortar businesses in 2021. 

Amazon’s latest quarterly financials tell the tale. For the company’s Q3, sales grew by 15 per cent year over year to $110.8 billion, which looked not so hot in versus 2020’s Q3 revenue growth of 37 per cent. Net income for this past year’s third quarter was $6.12 per share in comparison to the huge $12.37 per share for 2020’s Q3. 

Going back to the previous year looks a little better, however, where Amazon’s Q3 2019 revenue growth was 24 per cent and earnings were at $4.23 per share.

Still, the market didn’t take too kindly to AMZN’s 2021 third quarter, which missed analysts’ estimates on the top and bottom and fourth quarter guidance for between four and 12 per cent sales growth came in lower than expected.

In his comments on the third quarter, CEO Andy Jassy made a point of highlighting the investments Amazon has been making to support business during the pandemic and the related global supply chain and shipping issues.

“We’ve always said that when confronted with the choice between optimizing for short-term profits versus what’s best for customers over the long term, we will choose the latter—and you can see that during every phase of this pandemic,” said Jassy in an October 28 press release. 

“In the first several months of COVID-19, Amazonians played an essential role to help people secure the requisite PPE, food, and other in-demand items needed, and we worked closely with businesses and governments to leverage AWS to maintain business continuity as they responded to the pandemic,” he said. 

“In the fourth quarter, we expect to incur several billion dollars of additional costs in our Consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs—all while doing whatever it takes to minimize the impact on customers and selling partners this holiday season. It’ll be expensive for us in the short term, but it’s the right prioritization for our customers and partners,” he wrote.

After the third quarter release, Raymond James analyst Aaron Kessler lowered his target price from $3,900 to $3,840 per share while reiterating his “Outperform” rating, saying that long-term growth in e-commerce and continued leadership in cloud computing will outweigh near-term headwinds.

“While Amazon reported another strong quarter of accelerating AWS growth and strong advertising growth, retail sales are slowing as consumers return to pre-COVID levels of online spending mix. Further, the company is anticipating significant labor and material cost pressure driven by inflation and global supply chain disruption which will weigh on near-term profitability,” Kessler wrote.