Extreme inflation, rising interest rates, the ongoing invasion of Ukraine, gas prices at record highs, China’s repeated COVID lockdowns, all after an extended pandemic-driven bull run. There is a lot to take in, and with Amazon stock down nearly 40% from its peak in July of 2021, some investors might be wondering if AMZN is oversold.
Amazon’s share price has been on a rollercoaster ride during the COVID-19 pandemic until now. From a high of $109.30 in February of 2020 pre pandemic, to a low of $81.30 in the March 2020 COVID dip, then on a steady climb to the mountain peak of $188.65 in July of 2021, until the eventual big tech drop of 2022 falling as low as $101.26 in May.
At first glance Amazon.com Inc.’s financial statements suggest that the picture for this company is unclear. Year-over-year revenue for March (March 2022 vs. March 2021) is up 7%, while year-over-year net income for March is down a whopping 147%. When some young apes pull up the Google Finance AMZN page and see these numbers, they might just drop their avocado banana.
Amazon has maintained its net income at relatively low numbers for the last five years while growing their revenue. This is not surprising since Amazon has consistently been investing in growing the company (which is one reason why Amazon has yet to pay a dividend). However, the recent fluctuations in net income during the last three quarters, even though gross revenues have remained relatively stable on their upward trend, hints at possible management problems or internal structural changes. This fluctuation in net income also coincides with Jeff Bezos transitioning to Executive Chair and Andy Jassy becoming the Chief Executive Officer. What did Andy do for net income to go into the negative territory for the first time in over 10 years?
Let’s look at five years of financial statements to find out.
Cost of goods (COGS) and COGS relative to sales looks decent.
While COGS has been rising, COGS relative to gross revenue has slowly been declining, implying slightly improving efficiency over the last five years.
Administrative expenses paint a similar picture.
Administrative costs have been rising quite a bit over the last five years, but as a percentage of revenue has remained pretty flat.
Yet pre-tax earnings in the last quarter got squashed.
What Happened? The details are in the March 2022 quarter financial statement under Other income (expense), net at -$8.57 billion. The large majority of this is from the Marketable equity securities valuation gains (losses) which includes a loss of $7.6 billion due to Amazon’s investment in Rivian Automotive, Inc. (“Rivian”) (ticker RIVN), an American electric vehicle automaker and automotive technology company founded in 2009. Not only has Amazon placed an order to buy 100,000 delivery vehicles from Rivian (custom made for Amazon), but has also invested quite a bit in the company (mostly in the form of preferred stock warrants and convertible notes, as well as shares during Rivian’s IPO). Rivian’s Initial Public Offering price was $78 per share. In the meantime, Rivian’s share price has seen a high of $179.47 and a low of $19.25. Most of Rivian’s high share price happened shortly after its IPO and has been on the decline since, recently trading around the $30 mark (a loss of 61.5% from the IPO price).
Another factor contributing to the steep “other” expenses is the foreign exchange risk related to intercompany balances denominated in various foreign currencies, which has an assumed 5%, 10%, and 20% adverse change to foreign exchange rates, which would result in losses of $230 million, $455 million, and $915 million. A strengthening dollar versus [a weakening] Euro is affecting corporate balance sheets of international companies by creating a decrease in value of European held assets.
The investment in Rivian has been the major eye soar on Amazon’s March 2022 quarterly financial statement. The rest of Amazon’s activities and results follow the trendlines for their respective categories.
Cash flows follow their historical 5 year trend.
A slight downtrend for the Operating Cash Flow Ratio for eagle-eyed investors but nothing to cause alarm.
Free Cash Flow to Sales has maintained a positive trend.
Free Cash Flow to Sales is a performance metric to see how much cash is generated from sales. Even though Amazon has been investing heavily for future growth, it has been able to maintain a five year [slight] upward trend in FCF to Sales.
The five-year Price to Free Cash Flow is trending [slightly] downward which is cause for concern.
This valuation metric is one way of evaluating the “cheapness” of the stock by indicating the company’s ability to generate more revenue. A low Price to Free Cash Flow could indicate the company is undervalued relative to Free Cash Flow (a buy signal), and a high Price to Free Cash Flow could indicate the company is overvalued relative to Free Cash Flow (a sell signal). Amazon’s Price to Free Cash Flow rose in Q1 of 2022 but has remained in the 5-year range.
Attention! Even though Amazon’s Price to FCF rose in Q1, indicating the share is less undervalued (or more overvalued) as compared to the previous quarter, Amazon’s share price has in the meantime fallen by more than a quarter! Amazon’ share price closed at $163.00 on March 31, 2022 (end of Q1). Since then it has dipped to the low of $101.26 on May 23, a 37.8% decrease. The current $118 share price is still a bargain in this context.
Russia’s February 2022 invasion of Ukraine shocked most of the world. With sanctions in place and Ukraine unable to export most of its commodities, prices for certain commodities, such as oil and wheat, have sharply increased (more so in Europe than in the U.S.A.) to levels not seen since 2009. Ukraine, sometimes referred to as Europe’s bread basket, is a major exporter of cereals, such as wheat, barley, and maize. So is Russia.
In 2021:
Ukraine was the 6th largest global exporter of wheat, Russia was 2nd.
Ukraine was the 3rd largest global exporter of Barley, Russia was 4th.
Ukraine was the 3rd largest global exporter of maize, Russia was 9th.
Ukraine was the 3rd largest global exporter of rapeseed, Russia was 5th.
Ukraine was the [1st] largest global exporter of sunflower seed oil, Russia was 2nd.
The disruption of having these two exporters cut off from many global markets can be seen affecting global food supplies, fuel shortages, fertilizer costs, and even resulting in a Bavarian brewery trading its esteemed beer for sunflower oil. Amazon as an online retailer, will surely face challenges due high delivery costs affected by gas prices. It has however been investing in electric vans to fulfill the final leg of the supply chain both in America and in Europe. Amazon will also face challenges as a cloud services provider since ongoing price surges and reduced buying power of consumers may abate the amount of company startups. The duration for these crises is unclear.
China’s zero COVID policy could become a serious headache for Amazon. China has been a factory to the world ever since it joined the World Trade Organization in December of 2001. When China issues new lockdowns to infected cities, supply chains are disrupted. Amazon has been able to manage this situation without too many setbacks so far. If China continues to issue lockdowns when the rest of the world has stopped relying on lockdowns, companies, including Amazon will need to find alternative sources for cheap merchandise. Due to political tensions between some countries and China, the search for alternative suppliers and a greater demand on self-reliance for necessary goods has already begun.
The annual inflation rate rose to 9.1% in June, “the highest since November of 1981”, a lot of that due to soaring gas prices. This will most likely hamper sales in the entire retail industry. The silver lining may be the need for more consumers to flock to price efficient retailers for the items they do buy. This could allow Amazon to maintain, and even build, its customer base, similar to how Walmart’s sales are often shielded during market downturns. Even with gas prices exceeding five dollars, and more in California, Amazon was able to continue its free shipping policies. That said, gas prices are on the decline and Amazon is looking to add electric vans to its supply chain. As the possibility of recession nears, which will most likely spur a slow down in consumer spending and company creation (affecting Amazon’s cloud services business), Amazon’s low prices and free delivery will be beneficial for downtrodden consumers. Exactly how these factors will balance out is unclear.
The Federal Funds rate has increased from 0.05% in April/May of 2020 to 1.58% in June of 2022, which is exactly where it was in February of 2020, right before the COVID-19 recession began. The market has been spooked by these rising interest rates causing stock valuations to drop, especially large technology companies which outperformed during the pandemic. Amazon’s stock price has fallen more than 46% since its peak of $188.65 per share in July of 2021 to the most recent bottom of $101.26 per share in May of 2022. The Federal Reserve’s Federal Open Market Committee members have signaled they expect rates to continue their ascent to around 3.4% by the end of 2022, and higher for 2023. (The last time the Fed Funds rate was that high was between August of 2005 and January of 2008. Amazon’s share price was stagnant for most of this period.)
Low wages and suboptimal working conditions have led to New York City Amazon workers unionizing, and more unionized locations in the future. Employees benefiting from unionizing is commonly accepted, the effects on the companies is usually accepted as negative. This may or may not be the case. Especially when the labor market is tight, and immigration rates dropped due to COVID-19 pandemic restrictions and changes in American policies. However, Amazon’s use of third-party staffing firms to provide “temporary” staff has resulted in Amazon indirectly hiring many illegal immigrants for its lowest paid positions. How increased unionization (if labor unions can continue their success) of Amazon warehouses will affect Amazon’s success is yet to be seen.
Amazon has been investing steadily in research and development, and in automation, which could make its union concerns irrelevant (eventually). The main reason for Amazon’s success over the years was its low prices, convenient delivery options, and its technological advantage of being an online retailer. As Amazon continues to innovate, its ability to reach more customers and grow revenue improves. But Amazon’s retail space is only half of the story. Amazon has been growing its subsidiary cloud service business, Amazon Web Services, Inc., steadily since 2002. Amazon is, and has been, the largest cloud service provider globally. For Amazon to continue to dominate in online retail (and retail in general), and continue to be the top cloud service provider, Amazon will need to spend heavily on research and development. During Q1 of 2022, Amazon spent $14.8 billion on “technology and content” (research and development), $6.9 billion more than the $7.9 billion in Q1 of 2019 [pre pandemic]. In annual terms, Amazon spent $56.0 billion on technology and content in 2021, which is $13.3 billion more than the $42.7 billion spent in 2020, and $20.1 billion more than the $35.9 billion in 2019 [pre pandemic]. So, Amazon increased its technology and content spending by 18.9% in 2020, and 31.1% in 2021. Amazon’s relentless pursuit of technological dominance should bode well for future success.
Amazon has a wide economic moat rating by Morningstar, representing Morningstar’s belief in Amazon having a sustainable competitive advantage which they believe will last at least 20 years. If Morningstar’s prediction is accurate, Amazon should be able to endure any short-term headwinds.
Amazon has dominated e-commerce for over a decade. It first exceeded $1 billion of annual revenue in 1999 and has consistently increased annual revenue since. Amazon’s retail prowess is not unlike Walmart’s. Walmart was able to disrupt competition when entering new locations (the Walmart Effect) and become the largest U.S. retailer by revenue by 1990. In similar fashion, Amazon has disrupted retail in the digital space. In 2021, Amazon was able to take Walmart’s place as the largest retailer outside of China in terms of total product sales (including third-party transactions). By being a platform for other online retailers, Amazon was the storefront with the majority of online sales, a rank it has held for quite a few years. Walmart is scrambling to catch up to Amazon on the digital front, but while 90 percent of Americans live within 10 miles of a Walmart store, more money is spent at Amazon. Further, only 33% of Amazon third-party sellers believe Walmart will be able to strongly compete with Amazon in the near future, only 22% of Amazon third-party sellers are even worried about competition from Walmart, a mere 7% of Amazon third-party sellers also sell on Walmart Marketplace (39% are considering it).
Find more information in Amazon’s current Prime offer here (ad).
Americans are shoppers by nature. The country is built on capitalism. Being able to win the sales game in America is a huge win. Walmart was the juggernaut that couldn’t be beat, until Amazon beat it. But Amazon’s true strength is its ability to also compete in foreign markets. Whereas Walmart failed to survive in European markets, Amazon boasts having 2,700 products sold per minute in Europe in 2020. While Walmart has shied away from most of Asia, Amazon continues to expand. This success for Amazon has not come without setbacks. In 2020, Amazon lost a court case against a French trade union resulting in Amazon closing its warehouses in France until it came to an agreement with the unions. Amazon has also witnessed strikes from employees in Germany.
Overall, the global economic outlook is very gray, but Amazon’s investment in future growth will probably allow the company to weather future troubles. Amazon’s financial statements are overall positive, and with the recent fall in share price taken into consideration, Amazon appears to be a good investment.
Here at Salty Analysis, AMZN is currently rated as a buy.
[All information posted on this site is for informational purposes only. It is not intended to be investment advice.]
[ Disclosure: The author of this post has a beneficial long position in the shares of AMZN either through stock ownership, options, or other derivatives. The author wrote this article themself, and it expresses their own opinions. They are not receiving compensation for it (other than from the Salty Analysis company). The author has no business relationship with any company whose stock is mentioned in this article. ]
[ We may earn a commission from links on this page. We participate in select affiliate marketing programs, which means we may get paid commissions on editorially chosen products purchased through our links to retailer sites. ]
Salty Analysis 
One thought on “AMZN (Jul 2022) Amazon.com, Inc.”