Retail is a low-margin business by its nature. In times of rising inflation, profitability is shrinking even more.
Get Amazon.com Inc. Reporthas never really had to deal with rampant inflation before. So we''re seeing a lot of worry and anxiety among investors.
Fear and uncertainty often provide the best opportunities for the event.
The Amazon Maven gives its views on the macro scenario today. Is the worst finally over? Will inflation continue for longer? What does it mean for Amazon shareholders? Is the stock undervalued, and should investors buy the decrease?
Figure 1:Aflationary Scenario: Why Amazon Stock Could Be Undervalued
Amazon is the world''s largest online store.
Google to Try E-Commerce: Why It''s Good News for Amazon Shareholders, read more from Amazon Maven.
Bullish Perspectives Amid Inflation
After the last time the Federal Reserve raised interest rates by 50 basis points, the JPMorgans Wealth Management division discussed a suitable path for stock market bulls.
Because our actual inflation has been a result of strong demand rather than a shortage of supply, prices might start to stabilize once companies are able to reorganize their inventories, as shown below:
The stock market in the United States is correlated in Figure 2. March 31, 2022.
Haver Analytics, the Census Bureau
While we may have to to muddle through several more helpful reports in the meantime, slower growth on the back of tighter financial conditions, continued normalization of COVID-driven inflation, and tougher year-over-year comps should, in our view, allow price pressures to begin decelerating into year-end, according to JPMorgans Global Market Strategist Madison Faller.
According to Faller, interest rates hikes by the Federal Reserve have helped relieve some of the pressure on the market, allowing it to stabilize with less hikes than the market had expected.
Buy the Dip?
The price of Amazon''s multi-million dollar is 2-4 times higher. Its closest e-commerce competitor, Walmart (WMT), according to a Get Walmart Inc. report, has increased by 0.54 percent in the last 10 years, on average.
Is Amazon also expensive?
According to Michael Dolen, the opposite is true.
While the latter is significantly profitable, Amazon is not only a asset-heavy retail business, but also a asset-light software company (AWS). The main difference is that the former has limited margins.
Dolen claims that AMZN investors are essentially buying AWS and receiving Amazon''s e-commerce services for free.
Dolen cautiously envisions that AWS will generate around $80 billion this year, $100 billion in 2023, and $125 billion in 2024. That implies a 25% decrease year over year, indicating a slowdown, if we consider the cloud arm''s recent quarters.
Comparing to other major ITs like Microsoft (MSFT) - Get Microsoft Corporation Report and a 33% profit margin, AWSs enterprise value should be $1.03 trillion.
Amazon''s current market cap is $1.27 trillion, at $125 per share. Does it feel like $125 is quite cheap?
Over the Long Run
The selloff has created an environment in which investors are exploring a wide spectrum of opportunities. JPMorgans Madison Faller believes this is a crucial time for entering both bonds and stocks (she also points out that quality is essential).
For the first time in years, we didn''t believe were paying a premium for equities. Equity valuations have been significantly compressed and are returning in line with longer-term estimates, according to the author.
In her assessment, Fallen did not discuss specifically AMZN or the IT sector, but we can conclude from Dolen''s assumption that the Seattle-based titan fits the possibility checkbox.
Amazon remains a good long-term investment, therefore.
This is not investment advice, according to disclaimers. The author may be long one or more items mentioned in this report, but the article may include affiliate links. These partnerships do not influence editorial content. Thank you for assisting Amazon Maven.
