Wed. Dec 8th, 2021

When the financial results for the second quarter of 2021 were announced, Amazon’s stock price fell about 7%.

I guess many of us didn’t expect this degree of drop from a major component of the S&P 500, but in reality this degree of drop is not uncommon for Amazon.

This tweet shows the historical price change of some of Amazon’s historical earnings announcements compiled by Evercore ISI.

There were periods when Amazon’s financial results disappointed analysts and this caused a -8% drop.

But is this fall in prices an opportunity to accumulate more or is there some concern?

The market has prices at a lower future valuation

Amazon’s historic result was fantastic.

For such a giant company, they managed to increase their revenue by 27% year-on-year.

Net profit grew from 5.5 billion to 7.7 billion years.

But the intrinsic value of stocks is not what Amazon did in the past, but what Amazon will do in the future.

Amazon pointed out that during the third quarter of 2021 they will generate revenue of between $ 106 billion and $ 112 billion. This is well below analysts ’consensus estimate of $ 118 billion.

Operating income will range from $ 2.5 billion to $ 6 billion, up from $ 6.2 billion in the third quarter of 2020.

This means Amazon’s revenue will grow by 10% to 16% in the third quarter of the year from year to year and operating revenue will be fairly stagnant.

The market fixes Amazon prices as a rising stock, and when growth appears to be low, they squander the stock price.

Recent earnings results make me realize that market participants expect these growing companies not to moderate the growth they benefit from COVID.

It is very likely that most of these companies will face tough quarterly comparisons with last year. COVID has pulled off years of growth for these companies in just a few quarters.

Market participants behave irrationally here and this could be our opportunity.

The targeting creates uncertainty in Amazon’s rating

In my last article on Amazon, I explained that some fund managers predict that if we value Amazon based on term earnings, we could get Amazon at a earnings price close to 20 times in 2025.

Amazon’s current trades are quoted at a price even higher than the price when I wrote that article.

If we look at my base case, we were anticipating a net profit margin of at least 7.5% and revenue growth of 30%.

Amazon’s third-quarter guidelines create uncertainty about whether the company can increase revenue by 30%. As of now, I think there is even uncertainty about whether growth can exceed 20%.

I wouldn’t say Amazon is expensive here, but that there is less margin for safety. The safety margin for investors like me is a high degree of confidence that Amazon can grow to 30% for 3 years with the same margin to reach the status of a mature company.

If Amazon behaves less like a mature company, but like a company that could still grow, this “growth expansion” is our alpha.

It may take longer for Amazon to cut its PE if we buy it today.

Again, Amazon’s PE has never been cheap. Simply moving forward, I had the feeling that there will be a change so that Amazon will focus more on free cash flow than on the service line.

It gives me the atmosphere when Tim Cook took over Apple, where there is a slight change of focus.

There are definitely some areas for which we can remain optimistic.

AWS and advertising are growing well

I had the feeling that looking at income would not always be the best thing in the future.

We need to see how well Amazon does in some segments that are starting to become the engine of cash flow. This would be:

  1. Amazon AWS
  2. Advertising

Increasingly, I feel like Amazon’s ditch is setting up a crazy logistics system that can never replicate others. Finally, the data they know from their own sales on Amazon and through their logistics network is fed by their advertising.

There are also two very important segments:

  1. First
  2. Retail relations with third parties (3P) as opposed to relations with third parties (1P)

Most borrowed ideas have a large tab that shows the growth of these 4 segments.

The following table also shows a breakdown of revenue growth in the different segments:

AWS growth recovered to 37% compared to 29% last year and looks even good compared to 32% in the first quarter of 2021.

Others, which represent advertising, are accelerating their growth and are likely to be a high-margin segment.

This means that, under the hood, the upper margin segments grow at a satisfactory high rate. 50% of moderate growth comes from the lower margin of online and physical stores.

The advertising engine is starting to get very important.

Intuitively, we think of Amazon ads on your website, but now advertising may appear in other areas. They’re putting ads on the boxes they deliver to people, on Amazon Prime Streaming TV and on Twitch.

Sometimes we just have to give them time and watch if Andy Jassy and the gang continue to do what Jeff Bezos does.

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