Amazon's corporate value is close to $1 trillion, and its fair value is $93.50 per share, which is close to the current market price.
$Amazon(AMZN.US$ “If the value of common stock falls by 50% in a short period of time and causes you extreme pain, then you shouldn't hold common stock.” —Warren Buffett
Easier said than done! The share price of Berkshire Hathaway (Berkshire Hathaway). BRK B shares — Buffett's investment group) have fallen 50% several times. As a result, Amazon's (NASDAQ: AMZN) stock price drop of 50% in 2022 is praiseworthy of historical significance. This isn't the first time since Amazon went public that its stock price has dropped by more than 50%. That's not going to make things any better.
So what really happened? Why did Amazon's stock price drop in the past 12 months while the stock market is underperforming? Investors are concerned about four key issues:
macroeconomic pressure on consumer e-commerce spending,
High costs have affected Amazon's e-commerce business and Amazon web services.
Amazon Web Services (AWS) growth is slowing, and
Stay away from high-growth tech businesses.
macroeconomic environment
Admittedly, the macroeconomic environment has deteriorated in 2022, and Amazon, like most businesses, is facing a more challenging business environment. Amazon is a leading e-commerce company in the US and many international markets (excluding China). Excluding AWS, its revenue far exceeds $400 billion. The slowdown in consumer (and business) spending will naturally affect Amazon. Amazon is also cycling through increased activity due to COVID-19. As the world economy continues to normalize, consumers are returning to physical stores, and the retail sector's e-commerce penetration rate is adjusting back to historical trends faster than expected. Amazon's growth rate will also slow down due to the law of large numbers. In our basic forecast, we have taken into account actual growth, and there is room for growth if the economic environment improves
Anyone who has run a business will tell you that cost issues are usually better than revenue issues. Amazon's revenue growth wasn't particularly disappointing, but the increase in costs and the resulting pressure on profit margins exceeded expectations. Cost pressures are evident on many levels — rising commodity costs are affecting gross profit margins, rising fuel and energy costs, inefficient infrastructure after rapid expansion, and rising labor costs affecting all aspects of Amazon's integrated operations.
Over the past 7 years, Amazon's total revenue has grown from about 100 billion US dollars to about 500 billion US dollars. For some very large numbers, the cumulative average growth rate has reached an astonishing 25%. The number of employees grew even faster, from 230,000 to over 1.5 million, equivalent to a compound annual growth rate of 31% (see chart below).
Changes in the Amazon minimum wage
Easier said than done! The share price of Berkshire Hathaway (Berkshire Hathaway). BRK B shares — Buffett's investment group) have fallen 50% several times. As a result, Amazon's (NASDAQ: AMZN) stock price drop of 50% in 2022 is praiseworthy of historical significance. This isn't the first time since Amazon went public that its stock price has dropped by more than 50%. That's not going to make things any better.
So what really happened? Why did Amazon's stock price drop in the past 12 months while the stock market is underperforming? Investors are concerned about four key issues:
macroeconomic pressure on consumer e-commerce spending,
High costs have affected Amazon's e-commerce business and Amazon web services.
Amazon Web Services (AWS) growth is slowing, and
Stay away from high-growth tech businesses.
macroeconomic environment
Admittedly, the macroeconomic environment has deteriorated in 2022, and Amazon, like most businesses, is facing a more challenging business environment. Amazon is a leading e-commerce company in the US and many international markets (excluding China). Excluding AWS, its revenue far exceeds $400 billion. The slowdown in consumer (and business) spending will naturally affect Amazon. Amazon is also cycling through increased activity due to COVID-19. As the world economy continues to normalize, consumers are returning to physical stores, and the retail sector's e-commerce penetration rate is adjusting back to historical trends faster than expected. Amazon's growth rate will also slow down due to the law of large numbers. In our basic forecast, we have taken into account actual growth, and there is room for growth if the economic environment improves
Anyone who has run a business will tell you that cost issues are usually better than revenue issues. Amazon's revenue growth wasn't particularly disappointing, but the increase in costs and the resulting pressure on profit margins exceeded expectations. Cost pressures are evident on many levels — rising commodity costs are affecting gross profit margins, rising fuel and energy costs, inefficient infrastructure after rapid expansion, and rising labor costs affecting all aspects of Amazon's integrated operations.
Over the past 7 years, Amazon's total revenue has grown from about 100 billion US dollars to about 500 billion US dollars. For some very large numbers, the cumulative average growth rate has reached an astonishing 25%. The number of employees grew even faster, from 230,000 to over 1.5 million, equivalent to a compound annual growth rate of 31% (see chart below).
Changes in the Amazon minimum wage
Amazon added 500,000 employees in 2020 and another 300,000 in 2021 to address rapid growth and support international expansion during the pandemic. In recent times, Amazon's revenue growth has slowed at a very high base, and revenue from online product sales has remained essentially flat. Simply put, Amazon is overhiring and is gradually adjusting its employee base to increase productivity. Recently, Amazon confirmed 18,000 layoffs, mainly in Amazon stores and people, experience, and technology departments.
While we don't want redundancy in densely populated warehouses and transportation areas, we do want thoughtful alternatives to attrition and continued productivity efficiency. There are already initial signs that the total number of employees will decline in 2022.
Amazon's employment system is far from perfect. In other words, Amazon has been at the forefront of raising the minimum wage in the US. As shown in the table below, Amazon has supported a minimum starting wage of $15/hour since 2018, and currently the average starting salary for warehouse and transportation workers is around $19/hour. The US federal minimum wage remains at $7.25 per hour in 2009.
Share compensation: Share-based compensation and SBCs as a percentage of revenue
Amazon needs to pay competitive compensation to attract and retain the best talent, particularly in the Amazon Web Services department. Amazon's share-based compensation structure has some special quirks, which led to adjustments in 2022. However, by 2022, stock-based compensation is estimated to have increased by $7 billion, to around 4% of total revenue compared to the 2% lower in the past. Technology companies, including Amazon (Amazon), announce layoffs almost every day, and may have already passed the peak of technology employment costs. Amazon's SBC spending is not expected to reverse and is expected to remain stable in the future.
Transportation and fulfillment costs
Higher fuel, freight, and employee costs, operational efficiency, and rising service levels are all reflected in Amazon's increased shipping and fulfillment costs. Over the past few years, these costs have risen from approximately 26% to 35% of Amazon's total revenue (excluding AWS), although ad and subscription revenue continues to grow substantially, and these revenues do not include shipping or fulfillment costs (see chart below).
Shipping and fulfillment costs as a share of Amazon's total revenue (excluding AWS)
Transportation and fulfillment costs
Higher fuel, freight, and employee costs, operational efficiency, and rising service levels are all reflected in Amazon's increased shipping and fulfillment costs. Over the past few years, these costs have risen from approximately 26% to 35% of Amazon's total revenue (excluding AWS), although ad and subscription revenue continues to grow substantially, and these revenues do not include shipping or fulfillment costs (see chart below).
Shipping and fulfillment costs as a share of Amazon's total revenue (excluding AWS)
Subscription services (including Prime services), advertising, and other revenue as a percentage of total Amazon revenue (excluding AWS)
Amazon added 500,000 employees in 2020 and another 300,000 in 2021 to address rapid growth and support international expansion during the pandemic. In recent times, Amazon's revenue growth has slowed at a very high base, and revenue from online product sales has remained essentially flat. Simply put, Amazon is overhiring and is gradually adjusting its employee base to increase productivity. Recently, Amazon confirmed 18,000 layoffs, mainly in Amazon stores and people, experience, and technology departments.
While we don't want redundancy in crowded warehouses and transportation, we do want thoughtful alternatives to attrition and ongoing productivity efficiency. There are already initial signs that the total number of employees will decline in 2022.
Amazon's employment system is far from perfect. In other words, Amazon has been at the forefront of raising the minimum wage in the US. As shown in the table below, Amazon has supported a minimum starting wage of $15/hour since 2018, and currently the average starting salary for warehouse and transportation workers is around $19/hour. The US federal minimum wage remains at $7.25 per hour in 2009.
Share compensation share-based compensation and SBCs as a percentage of revenue
While we don't want redundancy in crowded warehouses and transportation, we do want thoughtful alternatives to attrition and ongoing productivity efficiency. There are already initial signs that the total number of employees will decline in 2022.
Amazon's employment system is far from perfect. In other words, Amazon has been at the forefront of raising the minimum wage in the US. As shown in the table below, Amazon has supported a minimum starting wage of $15/hour since 2018, and currently the average starting salary for warehouse and transportation workers is around $19/hour. The US federal minimum wage remains at $7.25 per hour in 2009.
Share compensation share-based compensation and SBCs as a percentage of revenue
Amazon expects a significant increase in remuneration based on stocks. Amazon needs to pay competitive remuneration to attract and retain the best talents, especially in the Amazon Web Services department. Amazon's share-based remuneration structure has some special quirks, which led to adjustments in 2022. However, by 2022, stock-based compensation is estimated to have increased by $7 billion, to around 4% of total revenue compared to the 2% lower in the past. Technology companies, including Amazon (Amazon), announce layoffs almost every day, and may have passed the peak of technology employment costs. Amazon's SBC spending is not expected to reverse, but is expected to remain stable in the future.
Although the number of units completed by Amazon increased nearly fivefold during this period, the cost of implementing and shipping online units increased by more than 40%. As Amazon has massively expanded its logistics network over the past few years, its operational efficiency will gradually increase.
Specifically, Amazon management commented that capital investment in 2022 is expected to be around $60 billion, similar to 2021. Compared to 2021, this could reduce fulfillment and transportation capital investment by about $10 billion to better align expansion projects with demand, and offset a year-on-year increase in technology infrastructure of about $10 billion, mainly to support the growth of AWS.
AWS is one of the highest quality companies in the world. In less than 10 years, AWS has developed into a business with revenue of 80 billion US dollars and operating profit of about 23 billion US dollars. Outside of China, only Microsoft (Microsoft)'s Google Cloud Platform through Azure and Alphabet (GOOG, GOOGL) is the only credible competitor. Technology, scale, and capital requirements are strengthening barriers to competition, and cloud computing has broad scope for further growth.
2021 was an extraordinary year for AWS. Despite a growing base, AWS's revenue grew by $17 billion to reach $62 billion, an increase of 37%, and the operating margin remained around 30%.
AWS is still expected to grow strongly, but the business is not spared at the macro level and will also be affected by the slowdown in customer growth in the technology industry, especially less mature companies. Amazon's growth rate is likely to be around 20% by 2022, which is still an exception, but Amazon's growth rate is likely to decline from recent levels and slow further over time. % operating margin is a more complicated discussion. Amazon (and its peers) has extended the life of its data center equipment, reduced depreciation, and increased operating margins. This caused the operating margin to soar to 35% in the first quarter of 2022. Subsequently, Amazon increased share-based compensation, which specifically targeted AWS and reduced operating margins to less than 30%. Operating margins for the third quarter of 2022 were further affected by weak operating conditions and rising energy costs. AWS's operating margin is expected to gradually increase from current levels.
AWS revenue and revenue growth
Although the number of units completed by Amazon increased nearly fivefold during this period, the cost of implementing and shipping online units increased by more than 40%. As Amazon has massively expanded its logistics network over the past few years, its operational efficiency will gradually increase.
Specifically, Amazon management commented that capital investment in 2022 is expected to be around $60 billion, similar to 2021. Compared to 2021, this could reduce fulfillment and transportation capital investment by about $10 billion to better align expansion projects with demand, and offset a year-on-year increase in technology infrastructure of about $10 billion, mainly to support the growth of AWS.
AWS is one of the highest quality companies in the world. In less than 10 years, AWS has developed into a business with revenue of 80 billion US dollars and operating profit of about 23 billion US dollars. Outside of China, only Microsoft (Microsoft)'s Google Cloud Platform through Azure and Alphabet (GOOG, GOOGL) is the only credible competitor. Technology, scale, and capital requirements are strengthening barriers to competition, and cloud computing has broad scope for further growth.
2021 was an extraordinary year for AWS. Despite a growing base, AWS's revenue grew by $17 billion to reach $62 billion, an increase of 37%, and the operating margin remained around 30%.
AWS is still expected to grow strongly, but the business is not spared at the macro level and will also be affected by the slowdown in customer growth in the technology industry, especially less mature companies. Amazon's growth rate is likely to be around 20% by 2022, which is still an exception, but Amazon's growth rate is likely to decline from recent levels and slow further over time. % operating margin is a more complicated discussion. Amazon (and its peers) has extended the life of its data center equipment, reduced depreciation, and increased operating margins. This caused the operating margin to soar to 35% in the first quarter of 2022. Subsequently, Amazon increased share-based compensation, which specifically targeted AWS and reduced operating margins to less than 30%. Operating margins for the third quarter of 2022 were further affected by weak operating conditions and rising energy costs. AWS's operating margin is expected to gradually increase from current levels.
AWS revenue and revenue growth
AWS operating profit and operating margin
Missing profitability: Excluding AWS, Amazon will report operating losses in 2022. Although Amazon faces cost pressure in its less mature international business and may experience significant losses, analysis shows that Amazon has experienced significant losses on projects that are not the core of Amazon's current business, such as Kuiper projects (satellites), Zoox projects (autonomous vehicles), Health, Alexa-related artificial intelligence projects, and video games. Experimentation and sideline development are at the core of Amazon culture and have spawned AWS and other important businesses. Investors will benefit from Amazon disclosing the scale of investment in these plans and strengthening cost controls, a process that may have already begun.
Amazon is a large and complex integrated business group that generates approximately $500 billion in revenue and employs more than 1.5 million people. Fundamentally, however, it is driven by two key drivers — e-commerce and cloud computing. Amazon (Amazon) and AWS are global leaders in e-commerce and cloud computing, respectively, and they are increasing the barriers to competition. Amazon is facing cost pressure, and the macroeconomic environment is deteriorating. Interest rates have risen sharply, which has indeed reduced the value of future income. As a result, Amazon's 2022 valuation assessment has been lowered, but this is not enough to justify a 50% drop in Amazon's stock price. We don't expect any panacea or quick fix to drive a rapid recovery in Amazon's profitability; future expectations need to be set at a realistic level. It also notes that Amazon has taken meaningful actions to improve operational efficiency and enhance long-term shareholder value. Amazon's stock has been oversold and offers compelling value. There is plenty of room for further growth before Amazon's stock price approaches fair value.
Amazon is a large and complex integrated business group that generates approximately $500 billion in revenue and employs more than 1.5 million people. Fundamentally, however, it is driven by two key drivers — e-commerce and cloud computing. Amazon (Amazon) and AWS are global leaders in e-commerce and cloud computing, respectively, and they are increasing the barriers to competition. Amazon is facing cost pressure, and the macroeconomic environment is deteriorating. Interest rates have risen sharply, which has indeed reduced the value of future income. As a result, Amazon's 2022 valuation assessment has been lowered, but this is not enough to justify a 50% drop in Amazon's stock price. We don't expect any panacea or quick fix to drive a rapid recovery in Amazon's profitability; future expectations need to be set at a realistic level. It also notes that Amazon has taken meaningful actions to improve operational efficiency and enhance long-term shareholder value. Amazon's stock has been oversold and offers compelling value. There is plenty of room for further growth before Amazon's stock price approaches fair value.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
Read more
Comment
Sign in to post a comment
