My thesis is available on Amazon (NASDAQ: AMZN) faces the same challenges as everyone else in these times of macro uncertainty.
Challenges of AWS
According to the third quarter 2022 presentation, AWS F/X adjusted operating profit will be 3Q21:
During the Q3 2022 conference call, CFO Brian Olsavsky explained concerns about AWS’ operating margin:
What’s happening lately is yes, stock-based comps (“SBCs”). There is — we’ve seen wage inflation this year, and especially by checks, employees are focused on his AWS. This is one element of him. We also see energy costs significantly higher than the impact of pre-pandemic electricity and natural gas pricing. So those prices have more than doubled over the last two years and are down about 200 basis points from what they were two years ago.
While this slowdown in AWS operating profit is worrying, it’s important to remember that AWS remains the leader in hyperscale clouds and is well positioned for the future. Many companies aspire to become hyperscale cloud providers, but only AWS, Microsoft (MSFT) Azure, and Google Cloud (GOOG) (GOOGL) are in that club on a global level. In addition, Google Cloud’s operating profit remains negative, and over the past 12 quarters, Google Cloud’s cumulative operating loss has exceeded $12 billion.
Overall revenue for the fourth quarter of 2021 was $137.4 billion, and revenue for the fourth quarter of 2022 is expected to be between $140 billion and $148 billion. If he reaches $144 billion, which is the midpoint of the guidance, this is just $6.6 billion more than he was seen in the fourth quarter of 2021. Also, the AWS segment itself is at least $3.5 billion higher than its Q4 2021 level, leaving only about $3.1 billion diversified to other segments. This means that Q4 2022 could be flat against his Q4 20 and Q4 2020 for his 1P segment below.
Sales growth has slowed, CFO Olsavsky said on a conference call in the third quarter of 2022.
As the third quarter progressed, sales growth slowed across many businesses and the aforementioned foreign exchange headwinds increased. We expect these effects to continue throughout the fourth quarter.
As noted above, Amazon isn’t the only company facing challenges in recent quarters. Shopify (SHOP) numbers are also lower than what we’re used to in terms of Y/Y growth. Shopify is not a marketplace, but both Shopify and Amazon are helping the merchant transition his GMV, and both are slowing down. Both companies will do well in the long term as the world continues to go digital, but they have benefited from the Covid-induced advances and are currently feeling the effects of the economic slowdown.
Q3 2022 total revenue of $127.1 billion, broken down by segment in the Q3 2022 release. While we typically see big gains in the previous quarter, our Q4 2022 guidance is just $140-148 billion. The increase in his SBC numbers noted by CFO Olsavsky, especially his 87% increase in technology and content, is concerning.
Given the way interest rates continue to rise, we no longer feel justified using 23x to 25x operating profit to value the AWS segment. I think multiples from 20 to 23x make more sense. We also feel more comfortable using trailing 12 months (“TTM”) rather than annualized numbers. AWS TTM operating profit is $22,929 million or 9M22 + FY21 – 9M21 or $17,636 million + $18,532 million – $13,239 million. Applying a multiple of 20-23 and rounding to the nearest $10 billion results in an AWS segment valuation range of $46-530 billion.
Grow Your Business: The new Multichannel Shipping and 3PL Solutions session at Amazon Accelerate 2022 will have visuals highlighting key investments in Amazon’s supply chain. Many of these investments have been obfuscated on the income statement line over the years, making it difficult to scope valuation to Amazon’s supply chain.
It’s easy to get caught up in the current macro challenges and forget what Amazon has achieved in recent years. Four years ago in the third quarter of 2018, his 1P sales and his 3P GMV at Amazon combined were only about half of Walmart’s (WMT) sales. volume level.
Amazon has a much higher percentage of 3P sales than Walmart. During the Q3 2022 conference call, his CFO, Olsavsky, said 3P sales were up from 56% of his total payable units in Q3 2021 to 3P in Q3 2022. said it increased to 58%. As of this writing, Walmart’s market capitalization is approximately $387 billion. The rest of Amazon’s segments outside of AWS are two he thinks are worth far more than Walmarts. So, rounding off to the nearest $5 billion, I’d say he’s worth at least $775 billion. This means that Amazon’s total valuation, including AWS, is from $1.235 trillion to he’s $1.305 trillion, and likely much higher.
Q3 2022 10-Q has 10,201,654,176 shares outstanding as of October 19. Multiplied by the October 30 stock price of $103.41, the market capitalization is just $1.055 trillion.
The market cap is below my valuation range, so I think this stock is a buy for long-term investors.
Disclaimer: The content of this article should not be relied upon as formal investment recommendations. Never buy stocks without doing your own thorough research.