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Pando CMS ETF holdings series: Amazon (AMZN)'s long-term value may not be discovered by the market
09 Jul 2024

 

Today, let’s delve into Amazon, a benchmark tech company that recently achieved new highs (July 2024). Known as a key holding for many investors, Amazon's profitability has long been driven by its cloud service, AWS, rather than its e-commerce. This shift from consumer-focused to business-focused operations brings new challenges to analyze, raising crucial points for consideration before making investment decisions.

 

Through a comprehensive analysis of Amazon’s financials, core businesses, AI impact, valuation, and risks, we find that Amazon is more than a major U.S. tech firm with solid fundamentals and a promising outlook. Due to the founder’s strategic insights, Amazon has a unique approach to capital markets and investor expectations, making it one of the few companies to reach new highs post the dot-com bubble.

 

Although Amazon's sharp decline in the 2000s left a mark, it has since continued to reach new highs.

 

Key Financial Highlights

 

On April 30, after U.S. trading hours, Amazon reported its Q1 2024 earnings, again delivering robust profitability. Sales and AWS growth were strong, with profit far exceeding expectations (+38%).

  • Total revenue: $143.3 billion, slightly above expectations.
  • AWS Revenue: $25 billion, up 17% YoY (forecast was 15%), with operating profit at $9.4 billion (expected $7.2 billion). Operating margins rose from nearly 30% to 37.6%, partially due to accounting adjustments.
  • North America: $6.5 billion profit, exceeding expectations, driven by strong advertising growth (+26.8%) and improved logistics efficiency.
  • International: Achieved $900 million operating profit, contributing significantly alongside AWS.
  • Outlook for Q2: Revenue forecast between $144-149 billion, profit forecast at $10-14 billion.

 

 

Amazon: More Than Just an E-commerce Company?

Many still view Amazon as an e-commerce company. However, its acquisitions of businesses like Whole Foods and Twitch suggest otherwise. In 2022, Goldman Sachs estimated AWS accounted for over 50% of Amazon’s valuation. Given its high-profit margins, AWS’s positive or negative news has a far greater impact on Amazon's stock than its e-commerce segment.

 

 

Strategic Shift: Profitability Focus

Historically, Amazon aimed to maximize free cash flow, often forgoing profit for growth. This changed around 2018, and recent years show a focus on profitable investments and efficient growth, marked by lower capex and higher cash flow.

Amazon’s evolving strategy toward profitability underscores its investment value, positioning it as a more stable choice for long-term investors.

 

 

Amazon in the AI Era: Benefits to Both Cloud and E-commerce

  • AWS AI Ecosystem: AWS continues to expand AI services like Bedrock and SageMaker, supporting customer needs while enhancing geographic reach.
  • Open Source AI Approach: Competing with Microsoft, AWS offers open-source AI models (e.g., Claude by Anthropic and Llama by Meta), providing customers with diversified choices.
  • AI-Powered Logistics: Morgan Stanley highlights Amazon’s leadership in robotics, driving efficiency in logistics and reducing costs in e-commerce.

 

 

Risks and Opportunities

 

Cost Cuts and Profitability: Unsustainable?

Amazon’s recent profits were due to cost reductions rather than revenue growth, raising concerns about sustainability. Moreover, competitor Temu’s North American entry, though impactful, poses limited direct risk due to Amazon’s high user retention.

 

 

Market Overoptimism on AI and Valuation

While AI optimism has driven Amazon stock to new highs, the long-term growth impact remains to be seen. Currently, Amazon’s EV/Sales multiple aligns with the 5-year average, and forward P/E ratios suggest reasonable valuation compared to peers like Microsoft.

 

 

Conclusion: Strategic Shift Enhances Long-Term Potential

 

Amazon’s transformation from a high-growth e-commerce giant to a balanced growth and profitability play showcases its appeal as a long-term investment. Investors should consider their own financial goals, risk tolerance, and monitor market shifts closely. Remember, rational investing and prudent decision-making are key to financial success.

 

 

 

Disclaimer:


Pando ETFs hold positions in Amazon. Analysis and information focus solely on Amazon’s financials and performance and do not constitute a comprehensive review of Pando's ETFs or strategies. Statements may contain forward-looking information, reflecting Pando’s current views on Amazon's future, but actual results may vary significantly. Please conduct due diligence and consult a qualified financial advisor before making investment decisions.

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