PhillipCapital analyst Timothy Ang has kept a “buy” rating on Amazon with a lowered target price of US$3130 ($4344) from US$4,079.
In his May 4 report, Ang observes that Amazon is facing medium-term headwinds from normalising e-commerce growth, lingering inflationary costs and fulfilment overcapacity after the Covid-19 pandemic demand spike.
On this, Ang has also lowered his FY2022 revenue and adjusted PATMI estimates by 3% and 15% respectively.
For 1QFY2022, Amazon’s revenue stood in line at 21% of the analyst’s FY2022 forecast, while adjusted PATMI came in at 15%, excluding a pre-tax valuation loss of US$7.6 billion from Rivian Automotive.
Amazon’s cloud business, which saw revenue grow 37% y-o-y to US$18.4 billion, surpassed Ang’s estimate of a 35% growth.
At present, Amazon Web Services (AWS) has expanded to 16 local zones in the US, with 32 more to come across 26 countries.
However, higher costs of US$6 billion from external factors such as transport rates, higher fuel prices, wage inflation, and internal factors like productivity and overcapacity have hurt margins. As such, Amazon’s operating margin was at 3.2%, significantly lower than an estimated 4.6% and at a 3-year low.
At the same time, of the total incremental costs incurred, US$4 billion of costs incurred from productivity and overcapacity may ease in the next few quarters.
At this juncture, advertising growth was also slower than expected. Advertisement revenue grew 23% y-o-y to US$7.9 billion as compared to an estimate of 26% by the analyst.
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The advertising segment, along with AWS, is a key driver of operating income, estimated to have contributed US$7.1 billion to 1QFY2022 operating income of US$3.7 billion.
“We believe moderating e-commerce growth as the economy reopens and supply chain shortages impacting seller inventories was to blame,” says Ang.
According to the analyst, guidance was weaker than expected for both revenue and margins, where revenue guidance was up to 8% lower than estimated, while the operating margin was up to 5% lower.
“At this juncture, the focus is to work down internal costs factors in productivity and overcapacity [for Amazon], while passing on some external costs to sellers through the 5% fuel and inflation surcharge announced on April 14,” says the analyst.
These measures however, will take time of up to three quarters, says Ang.
Shares in Amazon closed at US$2,175 on May 9.
Photo: Bloomberg
