Amazon Loses Its Trillion Dollar Tag amid the Tech Rout

Amazon stock (NYSE: AMZN) fell 5.5% yesterday which took its YTD losses to almost 42%. Importantly, the company’s market cap fell below $1 trillion. The company joins Meta Platforms and Tesla who have also lost their status as $1 trillion dollar companies.

While the broader markets have recovered and the Dow Jones surged in October, there has been a rout in tech stocks. Last week was particularly bad for Big Tech companies. Meta Platforms, Amazon, Microsoft, and Alphabet released their earnings last week.

The earnings failed to please markets and together these four companies lost $350 billion in market cap. It was the worst week ever for Meta Platforms stock and the social media giant has lost over $750 billion in market cap over the last year.

Amazon also spooked markets with its earnings

Amazon’s Q3 2022 revenues rose 15% YoY to $127.10 billion. However, they fell short of the $127.46 billion that analysts were expecting. The company’s sales in North America rose 20%. North America is the largest segment for Amazon in terms of revenues.

However, AWS is the literal cash cow for Amazon as it accounts for the bulk of the profits. In Q3 2022, AWS’s revenues rose 27% YoY to $20.5 billion. The segment posted an operating profit of $5.4 billion. Both the revenues and operating profits fell short of estimates. Nonetheless, the business is now at an annualized revenue run rate of $82 billion.

Advertising was a bright spot for Amazon

Advertising was a bright spot in Amazon’s third-quarter earnings and the business generated revenues of $9.55 billion which was higher than the $9.48 billion that analysts were expecting. The revenues increased 25% YoY.

The performance looked encouraging as companies like Meta Platforms and Alphabet warned of slowing ad spending. While Alphabet’s search revenues rose only 2% YoY, YouTube’s revenues actually fell YoY in the third quarter.

Things are even bleak for Meta Platforms as its revenues fell 4% YoY in the third quarter. The company said that revenues are expected to fall in the third quarter as well.

Hiring freeze in the advertising business

Reportedly, Amazon has frozen hiring in its advertising business. During the Q3 2022 earnings call, Amazon’s CFO Brian Olsavsky said, that AMZN is taking steps to “tighten our belt, including pausing hiring in certain businesses and winding down products and services where we believe our resources are better spent elsewhere.”

However, reports of hiring freeze in the fast-growing and profitable advertising business shocked markets. In its response to Bloomberg, Amazon said, “Amazon continues to have a significant number of open roles available across the company.”

It added, “We have many different businesses at various stages of evolution, and we expect to keep adjusting our hiring strategies in each of these businesses at various junctures.”

Notably, Amazon has previously said that it would continue to invest in AWS and advertising. The two businesses are growing fast and are quite profitable for AMZN.

Amazon provided weak guidance

For the fourth quarter, Amazon guided for sales growth between 2-8%. The guidance fell short of estimates. Notably, this quarter, Amazon held its second Prime Day of the year. While the company said that consumer reaction to the event was “great” the guidance does not seem to reflect that.

Olsavsky said, “As the third quarter progressed, we saw moderating sales growth across many of our businesses, as well as increased foreign-currency headwinds … and we expect these impacts to persist throughout the fourth quarter.”

He was also circumspect on the holiday spending in the US and said “we’re realistic that there’s various factors weighing on people’s wallets, and we’re not quite sure how strong holiday spending will be versus last year. And we’re ready for a variety of outcomes.”

Analysts are still bullish on Amazon stock

Despite the tepid earnings and guidance, analysts remain bullish on AMZN stock even as many slashed their target prices post the Q3 2022 earnings release. Deutsche Bank reiterated the stock as a buy and said, “Consistent with Amazon’s earnings, conversations with advertisers suggested the demand environment remained strong for the majority of 3Q, but tightened a bit exiting the quarter, especially in discretionary categories.”

Goldman Sachs also reiterated the stock as a buy. It believes that Amazon’s operating margins would expand over the next many years as the company improves margins in the North American e-commerce business and narrows the losses in international operations.

AMZN is trying to improve its margins amid high inflation

Amazon has been working to improve its margins amid high inflation. It has also raised Prime Subscription prices in North America as well as Europe. At the same time, it continues to make the offering better through the addition of new titles and has recently offered a one-year free GrubHub subscription to US users. It also completed the acquisition of MGM which has enhanced the library of Prime.

Amid rising streaming competition, it has become imperative for companies to add more and diverse content to their library.

Amazon has built a moat around the business

Amazon has invested billions in its logistics business and Gene Munster of Loup Ventures believes that it’s a strong moat for the company. Currently, Amazon has an excess capacity as it over-invested in the business expecting continued strong growth in sales.

However, as US retail spending has sagged amid spiraling inflation, Amazon finds itself saddled with excess capacity. It also had added to the inventory which it is now trying to clear. The October Prime Day did help AMZN clear some of the inventory and the company would hope to clear some more during the upcoming holiday sales.