The tech sector has seen some winners and losers over the past 12 months, with one stock that’s been knocked down a few pegs being Amazon (Amazon Stock Quote, Charts, News, Analysts, Financials NASDAQ:AMZN). The e-commerce giant has dropped 15 per cent of its value over the past month and is now 25 per cent below highs set last summer.
But while the trashing of high-growth names shows little sign of letting up, investors should be more interested in the fundamentals of companies like Amazon, says portfolio manager Bruce Murray, CEO of the Murray Wealth Group, who’s sticking by the stock and in fact is buying more during the current pullback.
“Buying growth stocks, when we get fear and stuff go through the market they’re vulnerable, and people have all made money in them so they’re easy to sell,” Murray said, speaking on BNN Bloomberg on Tuesday.
“The outlook for Amazon is still incredibly strong,” Murray said.
Having made its hay early in the pandemic before floating along for more than a year between mid-2020 and mid-2021, AMZN looked to be breaking out in November before the downturn hit mid-month, pulling down growth stocks across the board as market sentiment moved from growth to value amid rising interest rates and a search for better plays for the reopening of economies post-pandemic.
The stock made another minor run about a month ago after the company released good-looking quarterly numbers that beat on earnings, but again, the market seemed to be hell-bent on taking down tech and related areas like healthcare and pharma stocks.
The result has been a 16 per cent drop over the past six months in the Nasdaq Index where many of the big American tech companies like Amazon are listed compared to a loss of about seven per cent for the broader S&P 500.
But Murray says there are lots of reasons to keep holding Amazon.
“They’ve got three businesses: AWS or Amazon Web Services which on the data centre and the move to the cloud, they are the leader in that followed by Microsoft as a close second,” Murray said. “That business is booming and it’s very profitable.”
“The second business they’re getting into is advertising, a business with 70 per cent margins, and the other one they continue to have is Amazon Prime membership. People pay to that every year and they can raise the price every year,” he said.
“Their basic business is their retail business which makes three per cent margins, [but] you’ve got these three businesses that are growing way faster than retail, with margins of 60 to 70 per cent, and so this is a company that’s growing. It’s still growing 15 to 16 per cent on the top line, but the bottom line is growing faster as these businesses take share. And so we just think Amazon’s a great company. It’s still 42x earnings so it’s still expensive, but they’ve got years and years of growth ahead of them,” Murray said.
“We’re holding the stock and a lot of smart investment analysts have $4,000 target prices on Amazon, so we’ll leave it there,” he said.
Amazon released its fourth quarter 2021 financial on February 3, showing sales up nine per cent year-over-year to $137.4 billion, with net income doubling from $7.2 billion to $14.3 billion and representing $27.75 per diluted share or adjusted EPS of $5.80 per share. Analysts had been calling for $137.6 billion in revenue and adjusted earnings of $3.57 per share.
Management said labour supply issues and inflation were a factor and continue to weigh on the company. But CEO Andy Jassy said signs look good for a post-pandemic Amazon.
“When you combine how we’re staffing and scaling our fulfillment network to bring even faster delivery to more customers, the extraordinary growth of AWS with 40 per cent year-over-year growth (and now a $71 billion revenue run rate), the addition of marquee new entertainment like The Lord of the Rings: The Rings of Power and Thursday Night Football, and a plethora of new capabilities that we’re building in areas like Alexa, Ring, Grocery, Pharmacy, Amazon Care, Kuiper and Zoox, there’s a lot to look forward to in the months and years ahead,” said Jassy.
By segment, Amazon divides it business into North America retail, International retail and AWS, with North America representing the largest revenue portion but currently operating at a loss, as is International. For the 2021 year, the North America segment posted revenue of $279.8 billion and an operating loss of $7.3 billion, the International segment had sales of $127.8 billion and an operating loss of $0.9 billion and AWS had net sales of $62.2 billion but an operating profit of $18.5 billion.