Amazon Stock has Disappointed for Two Years: Would 2023 be Any Better?

With a YTD loss of around 44%, Amazon (NYSE: AMZN) is the third worst-performing FAANG stock of the year. The stock underperformed markets as well as peers in 2021 as well.

Notably, while 2022 has been a tough year for markets, especially the growth names, markets rose sharply in 2021. However, even last year, Amazon barely closed in the green and was the worst-performing FAANG of the year.

AMZN’s market cap has slumped below $1 trillion

In 2022, AMZN earned the dubious distinction of losing $1 trillion in its market cap from the peak. Its market cap is still 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 is officially in a bull market, some growth stocks continue to sag. Amazon and Meta Platforms have especially looked weak. Wall Street meanwhile continues to remain bullish on AMZN stock despite its underperformance.

JPMorgan names Amazon as a top idea for 2023

JPMorgan named Amazon as a top idea for 2023. It cited favorable comps, multiple growth drivers, and a secular shift towards cloud and e-commerce as the reasons for its bullishness. It also highlighted the recent discipline shown by Amazon management.

Argus Research analyst Jim Kelleher also advises dollar cost averaging in Amazon stock and termed it an “undisputed category leader.”

Cowen also reiterated the stock as overweight. In a client note, it said, “Amazon has several drivers that should yield robust global revenue growth with rising margins the next several years, namely (i) further B2C eCommerce market share gains in large retail verticals; (ii) emerging eCommerce verticals like B2B; (iii) significant opportunity in existing and newer international markets like India, Mexico and Australia.”

Most brokerages are bullish on AMZN stock

Most analysts are bullish on Amazon and see the short-term underperformance as transitory. Here it is worth noting that many brokerages including Goldman Sachs, Citi, and JPMorgan listed AMZN as a top idea for 2022 as well. However, the stock failed to live upto analysts’ expectations.

Amazon earnings have disappointed

Amazon disappointed markets with its Q3 earnings and guidance. Its 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.

Amazon provided weak guidance for the fourth quarter

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.

Amazon’s CFO Brian 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.”

What steps is Amazon taking to restore investor confidence?

Amazon has taken several steps to improve its performance. It has laid off thousands of employees as it tightens its belt amid the economic slowdown. The company has also shut down some loss-making ventures like food delivery, edtech, and wholesale distribution in India.

During the Q3 2022 earnings call, 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.”

Tech companies are facing heat over losses in new businesses

The company is also trying to limit losses in its other loss-making ventures like Alexa. Big Tech companies are facing pressure from stockholders to lower losses in their loss-making ventures. Meta Platforms for instance is facing shareholder ire over spiraling losses in its metaverse business.

TCI Investment, which holds over $6 billion worth of Alphabet shares, also wrote a letter to the management to cut losses in its loss-making businesses including its self-driving subsidiary Waymo.

Amazon AWS growth has come down

In the third quarter of 2022, the revenue growth of Amazon AWS slumped to the lowest level since 2014. Incidentally, the company started to separately report the revenues for AWS from that year only. The business has grown significantly since then and now has an annual revenue run rate of $82 billion.

Meanwhile, amid the economic slump, several AWS customers are looking to cut down on their cloud spending. In the third quarter, AWS was Amazon’s only profitable segment as both the North American and International e-commerce operations posted operating losses.

AWS Conference was held in Las Vegas

Amazon recently held the AWS conference in Las Vegas. After attending the event, Piper Sandler reiterated the stock as overweight even as it pointed to a moderation in cloud spending.

Over 50,000 people attended the event. AWS CEO Adam Selipsky said in his keynote address that “If you’re looking to tighten your belt, the cloud is the place to do it.”

While AWS continues to be the market leader, a poor macro environment and rising cloud competition are strong headwinds heading into 2023. Most brokerages meanwhile continue to have faith in Amazon stock despite two years of terrible underperformance.