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Don’t give up on Amazon, this portfolio manager says

With its stock split now on the books, e-commerce giant Amazon (Amazon Stock Quote, Charts, News, Analysts, Financials NASDAQ:AMZN) can get back to the business of making money — and that’s something that’ll likely come from its cloud computing arm more so than retail, says portfolio manager Jamie Murray of the Murray Wealth Group.

“Amazon has been really hit by every single issue that the broader markets have been seeing and the narrative is completely changed from last summer,” said Murray, head of research at Murray Wealth, who spoke on BNN Bloomberg on Tuesday.

“It’s still a name that we hold a relatively strong position in and we’ve owned it for years and we still plan on owning it,” he said. “We think a lot of the problems that it’s facing right now are shorter term and manageable.”

Amazon completed its 20-for-one stock split on Monday, taking its share price from over the $3,000 to $120-$125 as the company looks to make its shares more reasonably priced for the average retail investor. And while that segment of the investing public has grown in prominence in recent years, it’s Amazon’s future that remains under the microscope as its top and bottom line growth rates go through a resizing following the pandemic plenty of the past two years.

The numbers were on stark display in its latest earnings report in April where AMZN saw revenue climb by seven per cent, its slowest rate in two decades and much below the 44 per cent revenue growth posted one year ago.

“The pandemic and subsequent war in Ukraine have brought unusual growth and challenges,” said Andy Jassy, Amazon CEO, in a first quarter 2022 press release on April 28. “Today, as we’re no longer chasing physical or staffing capacity, our teams are squarely focused on improving productivity and cost efficiencies throughout our fulfillment network. We know how to do this and have done it before.”

“This may take some time, particularly as we work through ongoing inflationary and supply chain pressures, but we see encouraging progress on a number of customer experience dimensions, including delivery speed performance as we’re now approaching levels not seen since the months immediately preceding the pandemic in early 2020,” Jassy said.

The slowdown seems to have impacted Amazon’s share price which coupled with the general distaste of the past half-year for tech growth stocks has meant a 26 per cent drop in share value year-to-date and almost a 34 per cent decline since hitting a high this past November.

But Murray says investors should keep their eyes on the prize which in Amazon’s case is AWS, its cloud business that still has a lot of growth runway left.

“Amazon Web Services continues to deliver exceptional revenue growth and strong margins,” Murray said. “There are some concerns around the general technology slowdown that we’re going to see a slowdown in cloud spending. We haven’t seen that to date, but that’s still a risk out there.”

“But over the longer term, we’re still going to see more and more workloads moved to the cloud, [and] Amazon Web Services is still best of breed cloud services company and that hasn’t changed,” he said.

Murray said Amazon’s retail has been impacted by a macro move by consumers away from purchasing goods with their extra spending to favouring services and travel, leading to a bit of a physical goods overhang for the company. Amazon doubled it warehouse capacity over 2020 and 2021 but the expansion appears to have gotten ahead of itself as management has put a stop to the opening of new fulfilment centres and slow down the leasing and purchasing of new real estate.  

“Amazon really found themselves with too much fulfillment capacity after two years of being understaffed in that area, so they’re going to rationalize their fulfillment footprint,” said Murray. “We think if you look back four or five years ago, its retail arm was able to achieve a four to five per cent EBIT margin in North America and pretty much breakeven internationally as it scaled there. Last quarter, those numbers were both deeply negative,” Murray said.

“[But] we think over the next couple years Amazon should be able to get back to a positive EBIT percentage and that should drive the cash flow and profitability much much higher,” he said.

By segment, Amazon’s first quarter 2022 delivered an operating loss of $1.568 billion from its North American retail business and a loss of $1.281 billion from International. Those compared with operating income of $3.450 billion and $1.252 billion in Q1 2021, respectively. For AWS, on the other hand, operating income in the first quarter was $6.518 billion compared to income of $4.163 billion a year earlier.

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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