Buy Amazon on the dip, Scotia manager says

The stock will take a while to recover but in the current climate investors will make out fine with buying Amazon (Amazon Stock Quote, Charts, News, Analysts, Financials NASDAQ:AMZN). That’s according to Scotia Wealth advisor Greg Newman, who says Amazon’s business is too strong to ignore.

Shares of Amazon were off sharply to close out the week, as the market reacted to first quarter earnings from the e-commerce juggernaut. Amazon reported $116.44 billion in revenue, slightly above analysts’ consensus forecast but representing just a seven per cent year-over-year growth rate. That compares to the 44 per cent revenue growth of a year earlier, while management’s call for second quarter revenue growth of between three and seven per cent on a year-over-year basis represented more gloomy news for a stock — and a tech sector in general — that’s been losing ground for months as the market rotates away from growth stocks and towards value and more defensive plays. 

Year-over-year comparisons were undoubtably tough, as last year’s first quarter came during the depths of pandemic lockdowns when e-commerce sales boomed, but Amazon cited the war in Ukraine, supply chain and inflation issues as well as the dramatic ramp-up in business over the past two years as cause for “unusual growth and challenges,” according to Amazon CEO Andy Jassy.

“Our Consumer business has grown 23 per cent annually over the past two years, with extraordinary growth in 2020 of 39 per cent year-over-year that necessitated doubling the size of our fulfillment network that we’d built over Amazon’s first 25 years—and doing so in just 24 months,” Jassy said in a press release. 

Amazon also sported a big net loss of $3.8 billion for the quarter or $7.56 per share compared to a net income gain of $8.1 billion a year earlier. Part of the loss was attributed to Amazon’s investment in car-maker Rivian, whose stock has sunk and stuck Amazon with a pre-tax valuation loss of $7.6 billion.

Amazon’s share price zoomed skyward over the first stretch of the pandemic before more or less levelling off between mid-2020 and late last year. But a general pullback in tech since this past November has impacted AMZN, which went from about $3,600 per share in November to about $2,900. The stock ended trading on Friday down to $2,485.

But there’s too much going right for a company like Amazon to be that worried about the stock, says Newman, senior wealth advisor and portfolio manager at Scotia Wealth Management.

“Their top line actually beat [estimates] but it’s the slowest growth that they’ve had since the dot-com bust 20 years ago. It wasn’t that bad,” Newman said, speaking on BNN Bloomberg on Friday. “I think the thing that investors are focusing on is that they’ve admitted that they’ve overbuilt and that they’re going to have to work off some of those inefficiencies or grow into them.”

“ I think they’ve already overspent and spent that money. I think it gives them optionality if they execute well,” he said. “This is a staple of our economy. This is a necessary company and the key is buying it at levels that makes sense.”

Newman pointed to Amazon’s valuation where the stock trades at about 35x 2023 earnings with an assumed growth rate of 49 per cent. Still, he believes it will be a while yet before the stock starts moving up again.

“This will not do any heavy lifting for your portfolio. It’s going to be in the penalty box for the next three months, the next quarter or two, probably, but I think it does represent good long-term value here and so I think you can own a little bit. I think you can continue to own it here,” he said.

“Wait for a better day. I think you can probably add over weakness over the next three months and I think you’ll do well,” Newman said.

The teardown of Big Tech names continues, after both Netflix and Facebook got hammered in recent months over slowing growth prospects, but the damage is sector-wide, as tech stocks have been feeling the heat, especially those considered at the more speculative end of the market. The tech-heavy NASDAQ is now down over 21 per cent year-to-date compared to the wider which is down 13 per cent. 

Newman says the big tech names will do alright, despite the surrounding noise.

“Facebook just had a really, really good print and I think that they might have turned the corner. Apple, people were concerned about their $8 billion charge on [the COVID lockdown in Shanghai] but China will open at some point,” Newman said. “Microsoft had a great earnings report and it’s priced well. Google, I think investors were overly tough with them and they remain a pretty good growth [name] at a compelling price.”

“So, on balance, I’d say most of them work, and probably the black sheep of the group right now is probably Amazon but that too will end up working out, and I think you’ll want to buy into the noise over the next few months,” he said.