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Amazon.com, Inc. (NASDAQ:AMZN) has followed in the footsteps of other tech companies over the past few days, issuing a very disappointing fourth-quarter guidance. Amazon’s shares fell 4% yesterday after earnings from companies including Meta Platforms (META) and Alphabet (GOOG, GOOGL) weighed on the stock market.
After Amazon filed its fourth-quarter earnings chart after regular trading, the company’s share price fell another 13%. When the stock opens for trading today, the stock will immediately trade to fresh 1-year lows as investors reevaluate their growth assumptions. Given the poor outlook for Q4’22 and high losses in the e-commerce business, the stock’s risk profile remains on the downside!
The result beats, but not much more…
Amazon reported revenue of $127.1 billion for the third quarter, missing expectations by $370 million. However, Amazon’s Q3 earnings beat expectations, with actual earnings per share of $0.28 beating estimates by $0.08.
Search for Alpha: Amazon Q3’22 results
Amazon’s earnings release wasn’t all bad. The e-commerce company grew its third-quarter revenue 15% year over year to $127.1 billion, hitting its 13% to 17% growth target. However, the sales picture was mixed. Amazon’s North American e-commerce business saw a renewed acceleration in revenue growth in the third quarter, with revenue up 20% year-on-year to $78.8 billion, while Q2’22 revenue in that segment grew just 10% grew.
The international e-commerce business remained problematic for Amazon — in part due to a strong USD — where year-over-year sales growth fell 5% to $27.7 billion. In Q2 ’22, Amazon’s international revenue declined 12% year-on-year.
Amazon Web Services had another good quarter in terms of revenue growth, but Q3’22 wasn’t as strong as expected. The cloud platform segment generated $20.5 billion in revenue, up 27% year over year. I expected cloud to do better, posting at least 30% year-on-year growth in Q3 ’22 after the business segment’s operating margin rose 33% year-on-year in the prior quarter.
Not only is Amazon Web Services (“AWS”) the fastest-growing segment for Amazon, but the business is important to the company as well, primarily because it’s the only one making a profit. AWS posted operating income of $5.4 billion in the third quarter, while Amazon’s combined e-commerce operations lost $2.9 billion in the third quarter.
Amazon: AWS segment revenue/operating income
Scary growth slowdown expected for Q4’22
In my paper “Amazon: Judgment Day,” I cautioned that weak fourth-quarter guidance is likely to determine the direction of Amazon’s stock price in the near term. I ended my article with the following sentence:
There are several headwinds for Amazon including high inflation, slowing growth in its dominant e-commerce business and potentially a weaker outlook for Q4’22 which could weigh on the company’s shares post-earnings!
Amazon forecast fourth-quarter sales of between $140 billion and $148 billion, indicating a year-over-year growth rate of just 2%-8%. For the third quarter, Amazon forecast sales growth of 13%-17%, and my own estimate for fourth-quarter sales growth was 10%-14%. Amazon’s growth is clearly expected to slow, suggesting that the third quarter was an outlier quarter. Amazon’s revenue grew just 7% in Q2 2022, and its Q4 2022 outlook strongly suggests that Amazon’s growth story is over, at least for now.
Amazon is not a purchase
Amazon’s valuation and risk profile are not attractive now, as analysts react to Amazon’s weak fourth-quarter guidance and cut their fourth-quarter and full-year EPS estimates. Amazon’s EPS estimates already started falling ahead of the Q3 earnings chart release and I believe the EPS will see major downward revisions in the coming days.
Finding Alpha: Amazon EPS Estimates
Amazon is expected to earn $2.28 per share over the next year (a number that could also be revised down sharply), meaning the shares have a P/E ratio of 1.9X. I believe there will be further pressure on the valuation and the stock will likely be dead money for the foreseeable future.
Data from YCharts
Risks at Amazon
Amazon faces some major risks, including a further slowdown in revenue growth in the near term, continued pressure on Amazon’s consolidated operating margins from a loss-making e-commerce business, and a strong USD. In addition, estimates are likely to be downgraded after Amazon issued a disappointing Q4’22 forecast. I also see inflation as a major risk factor for Amazon going forward as it continues to weigh on consumer spending, to which Amazon remains vulnerable as one of the world’s largest e-commerce companies.
Final Thoughts
It’s over for Amazon. The e-commerce company could post growth of just 2% in Q4’22, essentially ending the argument that Amazon is a growth stock. Double-digit growth rates are likely a thing of the past, and I believe the e-commerce company will face growing revenue risks as its AWS business continues to slow and macroeconomic conditions worsen. The fourth quarter 22 outlook in particular was a shock and suggests investors may still be overestimating Amazon’s growth potential. For these reasons, I believe that both Amazon’s risk profile and valuation remain unattractive to investors!