There’s no question that rising interest rates and inflation are present threats to consumer spending, which is an estimated 70% of the U.S. economic growth - as a share of GDP. Aside from being a threat to future revenue, inflation is also driving up operating expenses for several companies. And this has impacted Amazon (AMZN), the nation’s second-largest retailer.
Over the past few quarters, investors have questioned whether Amazon can overcome these headwinds. Amazon’s execution has also been challenged ever since the company in Q1 reported a $3.8 billion loss. Not only was this its first quarterly loss in seven years, its operating income fell from $8.9 billion to $3.7 billion, while its operating margin dropped by 5% to 3.2%. In response, Amazon stock was punished, falling some 45% from its 52-week high of $188 (split adjusted).
Down more than 25% year to date, including 27% in nine months, now could be a time to buy as the company gears up to report its second quarter fiscal 2022 earnings results after the closing bell Thursday. In the last quarter, Amazon noted that inflationary pressures had an additional $2 billion in incremental costs, as did excess fulfillment capacity which was needed to meet pandemic-fueled e-commerce demand. Amazon, however, is pivoting to offset these weaknesses.
The company last week affirmed its interest in healthcare by recently spending nearly $3.9 billion to acquire One Medical, an operator of a membership-based primary care platform. The all-cash transaction values One Medical at $18 per share, or a near 70% premium. This merits of this deal and improvements in the company’s growth metrics will be the areas investors will focus on during the conference call. As the market is re-assessing tech valuations, it’s hard to ignore Amazon’s relative value, with the stock now trading some 35% below its 52-week high.
In the three months that ended June, the Seattle-based company is expected to earn 15 cents per share on revenue of $119.42 billion. This compares to the year-ago quarter when earnings came to 76 cents per share on revenue of $115.20 billion. For the full year, ending in December, earnings are expected to be 64 cents per share, down from $3.24 a year ago, while full year revenue of $520.43 billion would rise 10.8% year over year.
The projected year-over-year decline in full-year profit is one of several reasons why Amazon stock has been under pressure this year. Aside from rising costs, and higher inflation, the company has had to deal with labor shortages. The company built increased capacity in 2021, ramping up capital expenses devoted to fulfillment centers in order to meet unexpected e-commerce demand. The demand, however, was disrupted by Covid variants in the first half of the year.
The disruption resulted in a first quarter net loss of $3.8 billion, compared to its net income of $8.1 billion in the same quarter in 2021. The company’s first quarter operating margin also suffered, falling five percentage points to 3.2%. This placed its Q1 free cash flow at negative $18.6 billion for the trailing twelve months, reversing the $26.4 billion of free cash in the prior year.
But it wasn’t all bad. The company’s AWS cloud business in Q1 produced revenue growth of 37%, rising from $13.5 billion to $18.44 billion year over year. Owing to greater economies of scale, AWS margins were also strong, rising to 35.3% in the quarter, compared to 30.8% the year prior. On Thursday the market will want to see whether Amazon can improve on these metrics in the next several quarters.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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