Amazon Seen Rebounding, Bucking Retail Slump
Amazon (AMZN) stock is poised to rebound after plunging 36% this year as the retailer benefits from growing revenues at its cloud services unit Amazon Web Services (AWS), accelerating expansion and even possible acquisitions, market strategists say.
“If you look at the long-term horizon, I am extremely bullish on Amazon,” says Zillow´s former CEO Spencer Rascoff. “It may drop further but every company I talk to is focused on moving their business to the cloud and increasing web spending. Growth is hugely aggressive for AWS which is already worth $1 trillion.”
Rascoff was speaking as Amazon and other hard-beaten tech stocks were surging earlier this week as investors bought the dip after the S&P 500 posted its worst week of losses since 2020.
Growing footprint
“Amazon has an extremely strong cloud and e-commerce business,” says Max Wasserman, founder and senior portfolio manager at Miramar Capital, adding that its online franchise already accounts for 16% of the global market versus 12% in 2020. “I see Amazon turning around quicker than second-tier rivals” when the tech selloff ends, Wasserman adds.
Despite a challenging year in which consumers are battening down the hatches amid soaring inflation and weakening growth, Amazon insists its future is bright.
CEO Andy Jassy says the firm is working to tackle supply chain disruptions (notably those stemming from China's Zero Covid lockdowns) by placing orders much earlier than before and accessing more ports. Simultaneously, it's working to expand its retail business by building its grocery chain to compete with the likes of Walmart, building a low-orbit Internet satellite network, muscling its Prime entertainment business and fleshing out its autonomous taxi unit Zoox.
“When you look at companies that have great customer experiences like we do, I think we are going to do all right,” Jassy told the Bloomberg Technology Summit earlier this month. “We have a really broad selection of low prices and very fast delivery that's reliable to customers.”
Prime Video, future acquisitions
Jassy added he was “excited” about Amazon´s Prime Video unit where it plans to make “innovation” investments to bring unique content to take on the likes of Netflix, which recently cut staff amid slowing growth.
“We have 200 million subscribers who get their entertainment for free by being Prime members so we have a slightly different price model than others,” he noted.
One new addition is a big-budget series set in the Lord of the Rings universe, Jassy said, adding that Amazon's acquisition of Metro-Goldwyn-Mayer (MGM) will provide fresh know-how to help the business thrive.
Wasserman says Amazon could make new buys amid cheap valuations. “The weak players running out of cash are going to be bought and Amazon is in a prime place to absorb them at a much cheaper prices,” he said, adding that private equity buyers will also likely swoop in to make opportunistic purchases in the growing e-commerce space.
Despite slowing retail sales in 2022 (they are seen gaining up to 8% compared to 14% last year - according to the National Retail Federation), online sales in the U.S. and globally continue to boom.
E-commerce purchases continued to rise, accounting for 21% of total retail last year and now sitting at 22%, according to a Morgan Stanley report. The investment bank expects the space to hit $5.4 trillion by 2026 from $3.3 trillion currently, driven by rising mobile device ownership, logistics and marketplace expansion.
Supply chain woes
Still, Amazon and rivals such as Shopify continue to face supply chain challenges as well as rising fuel and freight costs due to the Russia-Ukraine war. Another big challenge will be to convince a growing number of consumers increasingly returning to brick-and-mortar stores to keep buying online, analysts say.
Amazon has not been immune to the tough retail environment. Shares dropped sharply in April after the company reported a $3.8 billion, first-quarter net loss, down from $8.1 billion in the year-ago period, largely due to a massive write down from investment losses in Rivian. Still, even without those losses, earnings would have still come in below expectations and Amazon conceded growth would slow in upcoming quarters.
Meanwhile, China's Zero Covid policy, which has triggered major lockdowns in key cities, has been a headache for U.S. retailers relying on goods from the country.
But CEO Andy Jassy remains optimistic: “If you look at different downturns, and we have been through a few in the past 25 years, customers change their habits, tend to be pickier about what they buy, when and from whom...They often pick the partners and companies they trust and with whom they have great customer experiences.”