Can Amazon Overcome the Challenges of Slowing Growth in the E-commerce Sector?

TipsForTraders | April 29, 2024

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Amazon (NASDAQ:AMZN) faces a notable shift in its financial landscape as industry experts predict a deceleration in revenue growth over the next three to five years. Historically, the tech giant experienced an annual revenue increase averaging 29% from 2002 to 2021. However, projections now estimate a more modest growth rate of 10% to 12% in the coming years. This slowdown aligns with the challenges of sustaining high growth rates on a large revenue base, with Amazon expected to generate around $614 billion in 2024.

The tenure of Jeff Bezos, which concluded with his resignation in late 2021, also marked the end of Amazon’s era of surpassing 20% annual revenue growth, coinciding with the stock price peaking at $188-$189 per share.

Recent financial disclosures reveal that Amazon’s North American operations achieved a record operating margin of 6.12% in the fourth quarter of 2023, surpassing previous highs during the pandemic-driven ecommerce surge. Despite this regional success, Amazon’s international operations have struggled, reporting negative operating income for the past ten quarters.

Amazon Web Services (AWS) continues to be a strong performer, with operating margins of 30.3% and 29.6% in the last two quarters of 2023. This segment remains critical, accounting for over 50% of Amazon’s total operating margins, even though it comprises just 14% of total revenue. Additionally, Amazon’s advertising revenue increased by 27% in the fourth quarter of 2023, marking its fifth consecutive quarter of growth.

However, Amazon has paused its stock repurchase program since June 2022, contributing to a slight dilution in share count. The company’s earnings per share (EPS) estimates have also seen significant adjustments, reflecting a more conservative growth expectation from a high of 62% down to 15%.

Looking ahead to the next retail sales report, data indicates that online sales continue to capture a larger share of the U.S. retail market, a trend underscored by the sector’s recovery post-COVID.

Financially, Amazon is set to report its first quarter of 2024 results with anticipated revenues of $142.6 billion and an operating income of $11 billion, corresponding to year-over-year growths of 12% and 15% respectively. At a trading price of $180 per share, Amazon’s valuation stands at 43 times the expected EPS of $4.14 for 2024, reflecting a robust growth forecast of 15%.

Key valuation metrics also indicate a price-to-sales ratio of 3x and more stretched valuations in terms of cash flows, with price-to-cash-flow and price-to-free-cash-flow ratios standing at 21x and 64x respectively. This financial assessment suggests a potentially improving free cash flow scenario as the market emerges from the “Covid constipation.”

The broader market context shows mixed results for mega-cap earnings, with peers like Microsoft (NASDAQ:MSFT) navigating through higher capital expenditure forecasts, while Amazon has yet to detail its strategic plans for AI investment, which could significantly affect its capital expenditures and free cash flow.

Morningstar values Amazon stock at $185, closely aligning with current trading levels, although internal models suggest a potential value up to $230 per share. Market reactions post-earnings announcement will be critical, especially if the stock price surpasses $190, which may signal a breakout.

In conclusion, as Amazon approaches its first-quarter results of 2024, the company appears to be in a stable position, bolstered by strong margins in AWS and accelerated growth in advertising revenue. While the company transitions from high-speed revenue growth to focusing on profitability and market share expansion, it faces the dual challenge of managing large-scale operational efficiencies and integrating emerging technologies like AI into its ecosystem. The strategic decisions Amazon makes in the near future will likely define its trajectory in an increasingly competitive digital marketplace. Investors and stakeholders should watch closely as Amazon continues to adapt to these evolving market dynamics.