Why Amazon Stock Fell 9% In A Day?

Amazon’s stock (NASDAQ: AMZN) dropped 8.8% on 2nd August, as compared to a 1.8% decrease in the S&P 500 index. In sharp contrast, Amazon’s peer Microsoft (NASDAQ: MSFT) was down 2% on that same day. The AMZN stock price fell after the company announced second-quarter results, missing the revenue estimates and issuing lower-than-expected financial guidance for Q3. The effect was further amplified by weak labor market data – the unemployment rate rose to 4.3% in July (the highest since October 2021), fueling the fear of a slowdown among investors. Overall, at its current price of $168, AMZN stock is trading 20% below its fair value of $210 – Trefis’ estimate for Amazon’s valuation. 

Amid the current economic scenario, AMZN stock has seen little change, moving slightly from levels of $165 in early January 2021 to around $170 now, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period. Overall, the performance of AMZN stock with respect to the index has been quite volatile. Returns for the stock were 2% in 2021, -50% in 2022, and 81% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that AMZN underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Consumer Discretionary sector including TSLA, HD, and TM, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AMZN face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

The company posted net sales of $148 billion in the second quarter – up 10% y-o-y. It was driven by a 19% rise in the Amazon web services (AWS) unit, followed by a 9% gain in North America and a 7% increase in the international segments. While AWS witnessed strong growth in the quarter, it still fell short of around a 30% jump witnessed by rival cloud businesses – Microsoft and Alphabet. Further, the growth rate in North America has suffered due to intense competition in the space. On the cost front, the operating expenses as a % of revenues decreased in Q2, leading to an operating margin of 9.9% vs 5.7%. In addition, total non-operating income increased from -$118 million to $573 million. Overall, the net income almost doubled to $13.5 billion.

The top-line grew 11% y-o-y to $291.3 billion in the first six months of FY2024. It reported growth in each of the three segments –North America (11%), International unit (8%), and AWS (18%). Further, operating income improved from $12.5 billion to $30 billion over the same period. That said, the bottom line was partially offset by an increase in other expenses from $382 million to $2.7 billion. Altogether, the net income rose by 141% to $23.9 billion.

Moving forward, AMZN expects the revenues to remain between $154 billion to $158.5 billion in Q3 2024. Overall, we estimate Amazon’s revenues to touch $634.3 billion in FY2024. Additionally, the adjusted net income margin is likely to see some improvement in the year, resulting in revenue-per-share (RPS) of $60.80. This coupled with a P/S multiple of just below 3.5x will lead to a valuation of $210.

[1] Returns as of 8/5/2024
[2] Cumulative total returns since the end of 2016

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