There are no guarantees, but at current price levels and with the still-solid future ahead for the e-commerce giant, investors are going to do well owning Amazon (Amazon Stock Quote, Charts, News, Analysts, Financials NASDAQ:AMZN). That’s the take from portfolio manager Shane Obata with Middlefield Capital, who just named Amazon one of his top picks for the year ahead.
Amazon’s rise and fall over the past two years has been a sight to behold, with the online shopping behemoth raking it in over the pandemic as e-commerce sales boomed. Investors took note, boosting the stock to about a double over the 24-month span of 2020 and 2021. But the last 12 months have pretty much given back all of those gains, as the market continues its turn away from tech stocks, punishing the big and the small.
Amazon is still a huge winner over the longer term, of course — consider that the stock is about a ten-bagger over the past decade —- but with the current pullback, investors are likely and rightfully skittish about putting any new money into it.
But Obata says there are a number of reasons to be confident about Amazon, starting with the fact that its two main businesses in e-commerce and cloud computing are likely to have tailwinds aplenty for the foreseeable future.
“Amazon is still the leader globally in e-commerce and they’re still the leader in cloud computing. These are two powerful secular trends that are going to continue on their path regardless of what happens with the economy as it goes through its normal course cycles,” said Obata, speaking on BNN Bloomberg on Friday.
Amazon shares took a bath a couple of weeks ago after third quarter earnings saw a miss of analysts’ estimates on revenue as well as weaker-than-expected fourth quarter guidance. Amazon posted a Q3 topline of $127.10 billion versus the Street’s call at $127.46 billion, while the fourth quarter was billed at revenue between $140 and $148 billion, representing a thin year-over-year growth rate of between two and eight per cent and coming in under analysts’ average expectation at $155.15 billion.
“In the past four months, employees across our consumer businesses have worked relentlessly to put together compelling Prime Member Deal Events with our eighth annual Prime Day and the brand new Prime Early Access Sale in early October. The customer response to both events was quite positive, and it’s clear that particularly during these uncertain economic times, customers appreciate Amazon’s continued focus on value and convenience,” said Andy Jassy, Amazon CEO, in an October 27 press release.
Amazon stock fell about 13 per cent following the Q3 release and the stock has dropped further since, now sitting at a year-to-date return of about negative 46 per cent.
But Obata says Amazon’s business fundamentals are still strong and earnings look likely to be booming going forward.
“Part of what scared investors was the margins came in and operating income came in a lot lower than people had expected. And because Amazon is running at pretty thin margins any kind of hiccups on the profitability front really scare people,” he said.
“But that doesn’t really affect the long term viability. They’re a good company, they’re going to figure it out,” he said. “AWS and advertising continue to grow faster than the retail business and those are both more profitable divisions. Amazon spent so much money during COVID in building out their fulfillment network, and that’s not going to continue indefinitely, so when that capex moderates, all of those things together should lead to significantly higher profitability for this company.”
“And so, at a time when people want profitability now, [owning Amazon] seems a little tricky, but this is going to inflect, we think, in a major way over the next few years,” he said.
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