Amazon’s stock dropped nearly 20% in after-hours trading on Thursday after the company reported weaker-than-anticipated sales during the crucial holiday shopping season.
The tech industry has been hit hard this week, and this company is the latest to let down investors on Wall Street. Inflation and rising interest rates have made it difficult for Amazon to maintain low prices after experiencing rapid expansion during the pandemic. The company has put a hold on the construction of new buildings, rented out some of its storage space, and frozen some of its employee hirings.
During the fiscal quarter ending on September 30th, Amazon reported sales of $127.1bn, which was below market expectations. After losing money for two consecutive quarters, the company turned a $2.9 billion profit. However, it was Amazon’s forecast for the crucial holiday quarter that caused concern.
During the fourth quarter, Amazon projected net sales between $140 billion and $148 billion, while analysts predicted sales of $155.15 billion.
CEO Andy Jassy recently remarked, “I’m encouraged by the steady progress we’re making on lowering costs in our stores fulfillment network, and we have a set of initiatives that we’re methodically working through that we believe will yield a stronger cost structure for the business moving forward.”
We will streamline our investments to account for the many changes in the macroeconomic environment without sacrificing our most important long-term wagers. Our commitment to providing excellent service to customers will remain unchanged, and we are confident in our ability to do so during the busy holiday shopping season.
After other major technology companies posted dismal financial results, Amazon followed suit. This week, Facebook’s parent company, Meta, reported its second consecutive quarter of declining revenues and warned of rising costs and losses at its metaverse unit,
sending the stock price of Facebook’s parent company tumbling to multi-year lows. Shares of Alphabet and Microsoft have dropped as the companies have predicted slower sales growth.
Indeed, What’s The Point
With a net gain of 15% year-over-year, Amazon’s sales reached $127.1 billion. Revenue for the market leader in online shopping increased by 19% excluding the effects of currency fluctuations.
But Amazon Web Services sales growth slowed to 27% from 33% in the second quarter and 39% in the same period a year earlier. Investors were understandably concerned about the slowing growth of AWS, as the division is commonly known because it is Amazon’s most important profit driver.
In addition, Amazon’s retail margins were squeezed by increasing fulfillment and labor costs, while the company’s cloud computing operations were hampered by rising energy costs. Turning to Amazon’s bottom line, operating income dropped by 49% to $2.5 billion.
Even more concerning was Amazon’s advice. During the final three months of the year, management anticipates a slowing in sales growth to between 2% and 8%. Wall Street had expected the company to report revenues of around $155 billion, so its forecast of $140 billion to $148 billion was disappointing.
CFO Brian Olsavsky told investors on a conference call that spending cuts were being made by both individuals and businesses due to rising prices and other economic worries.
Have Amazon’s Efforts To Unionize Affected The Company’s, Bottom Line?
Amazon has been featured on numerous “top employer” lists in different countries, which the company uses to claim that it provides its employees with a great working environment.
In response to a close unionization election defeat in Bessemer, Alabama last spring, Jeff Bezos said, “we need to do a better job for our employees.” Nonetheless, management has repeatedly stated in public that they do not think a union is in the best interest of employees.
Staten Island, New York, Amazon workers approved a union earlier this month, making them the first warehouse in the company’s history to do so. Amazon has raised multiple allegations that the vote should be thrown out because of irregularities.
Unionization is on the rise in the United States, and low wages and inhumane working conditions at Amazon are major factors driving this trend.
Over 4,000 American workers participated in a survey conducted by the labor rights group Change to Win in April 2020.
Although current conditions, including currency headwinds and slowing retail sales, are negative for Amazon’s results, the company’s outlook is clearly not as bleak as the market expects. The average price target among analysts is currently $175, which is an increase of 58%.
Although this could be optimistic, a more realistic goal of $125–$127 would represent an upside of about 15%. As EPS took a nosedive, P/S dropped to 2.44. Over the longer term, we expect net profit margins to recover to the 7% to 8% range and the forward P/E to settle in the $30 to $35 range.
Investors should be pleasantly surprised by the fourth-quarter results, as the top line is expected to grow at a moderate pace. It’s likely that revenue and liquidity will remain stagnant for at least another two to three quarters.
The Entrepreneur Index follows the stock performance of some of the largest publicly traded companies that were founded and are currently led by entrepreneurs.
There may be some difficulties in the near future, but Amazon has a promising future overall. As inflation slows, its fuel, shipping, and electricity costs should become more manageable. And now that the company’s massive fulfillment network has doubled in size due to the pandemic, Amazon is working to make it more efficient than ever.
It’s important to remember that the transition to cloud computing is still in its infancy. In April, CEO Andy Jassy estimated that only about 5% of worldwide IT spending was in the cloud. Yet Gartner predicts that by 2025, the cloud will account for more than half of corporate IT spending across all major markets, including application software, infrastructure software, business process services, and system infrastructure.
Because of the above-mentioned technological developments, AWS is expected to continue to be a potent and highly profitable growth source for many years to come. For this reason, long-term investors may want to use the recent drop in Amazon’s stock price to buy some shares at a significant discount rather than sell.
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