Driven by prolonged monetary tightening, the tech-heavy Nasdaq Composite Index which suffered the worst of the three major averages, lost 34% to end 2022. Among the biggest decliners were large-cap technology stocks such as Amazon (AMZN). Rising interest rates and rising inflation pressured consumer spending, which is an estimated 70% of the U.S. economic growth - as a share of GDP. Inflation also drove higher operating expenses for several companies like Amazon, which pressured its profit margins.
Over the past few quarters, investors have questioned whether Amazon can overcome these headwinds. The company’s investments its workforce along with research and development has taken a sizable portion of what would have otherwise fallen to its operating income bucket.
These expenses, along with the recent expansion of its data centers and logistics capabilities have hurt Amazon's bottom line. Heading in 2023, investors want to know what the company can do to regain its dominance. The answers have been reflected in the stock. The company's decelerated profit growth has been one the key reasons for the stock’s struggles. However, now could be a time to buy Amazon stock. There is some evidence that Wall Street remains overly bearish on tech stocks, which is understandable given that economic conditions around the globe continues to worsen in many geographic areas. There’s also a technical breakdown in tech stocks, while fundamentally, earnings multiples have begun to compress lower. Not to mention, it’s still a waiting game to see what guidance for 2023 will look like.
All of that said, there are many reasons to expect Amazon to consistently surpass Wall Street estimates, thanks to a combination of higher margins, more accommodative monetary policies, and moderating inflation which will lead to an overall improvement in the macro climate, all of which will benefit Amazon’s businesses. Heading into 2023, I expect these events not only to drive higher earnings per share, but also free cash flow. The e-commerce giant is expected to reach 2022 revenue above $500 billion. The question will be its profitability, where net income is expected to reach roughly $10 billion.
There is also the company’s dominant AWS cloud platform to be optimistic about. In Q3, AWS' net revenue surged 28% year over year to $20.5 billion. Its ability to lock in customers to its service makes AWS a highly valuable business and one of the major reasons the tech giant is nearing annualized revenue run rate of $82 billion. That said, limited profitability remains an overhang for the stock and the main reason for the reversal. The full-year EPS is expected to be a loss of 10 cents per share, compared to a profit of $3.24 a year ago.
Amazon will report Q4 earnings in a few weeks. For the quarter that ended December Wall Street expects adjusted EPS of 19 cents per share on revenue of $145.47 billion. Since the start of the quarter, EPS estimates have declined by 20 cents. This suggests the Street is not confident the company can overcome the inflationary pressures consumers are dealing with, but it does make the EPS beat and an upside guide more realistic.
With the stock trading near 52-week lows, Amazon's risk-versus-reward profile suggests the stock deserves more love.
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.
Read Richard's Bio