- Analysts out in force to back long-run investment case

- AWS capex and retail cost cutting to spark recovery

- Q3 update ‘not thesis-changing’, says JPMorgan

Online retail giant Amazon (AMZN:NASDAQ) is no longer a trillion company after its stock plunged overnight in the wake of weaker-than-expected third-quarter results and cut guidance for Q4.

Ahead of Wall Street’s reopening later today, Amazon pre-market action is pointing to a 13% fall for the stock to $96.70, implying a market cap of about $983 billion, the first time the stock has fallen below $100 since the start of the pandemic.

The shares slumped as much as 20% in the market’s initial response, prompting supporters among analysts to come out fighting. Goldman Sachs analysts said the 20% move lower in after-hours trading was ‘well overdone,’ while Citi told clients to ‘take advantage of any material pull-back in shares.’

Amazon reported a Q3 earnings per share of $0.28 on revenue of $127.1 billion, versus the consensus of $0.22 on revenue of $127.76 billion. Overall, sales rose 15% compared to the year-ago period while the operating income came in at $2.5 billion with the company saying FX headwinds resulted in a $5 billion hit in Q3.


Another major issue with Amazon’s Q3 report is that Cloud business AWS’ revenue grew at its slowest pace on record, up 27% to $20.54 billion, much lower than the 31.9% consensus growth estimate and a major slowdown compared to last year’s 39%.

Amazon shares were also hit by weak Q4 guidance as the e-commerce giant expects its revenue to come in between $140 billion and $148 billion, versus around $155 billion previously forecast. Guidance on operating income was for anything from $4 billion to zero, showing how difficult markets are right now. Average analyst estimate for operating income was $4.66 billion.


Goldman analysts admitted that the results were ‘mixed’, saying that the worry is that Amazon growth has begun to slow ‘before the margin narrative is repaired.’ Still, they remain bullish longer-term, with a $165 price target on the stock, down from $175.

‘We are unchanged in our long-term view of the potential for cloud computing (as evidenced by Amazon’s $104 billion revenue backlog that grew 57% year-on-year) but acknowledge that economic conditions will likely produce slower than normal growth and margins in the coming quarters.’


Goldman’s analysts also said they remain convinced in a multi-year operating income margin expansion story for Amazon on the back of improved eCommerce margins, less International losses and higher profit margin mix contribution from AWS and advertising.’

Citi analysts also pulled back on price target, lowering from $185 to $145, but also flagged margin improvement ahead. ‘The debate going forward is likely to be around margins, which we believe can improve throughout 2023 as Amazon returns to positive free cash flow and note management has prioritised AWS capex spend over free cash and transportation services this year, is culling products, and has implemented hiring freezes across certain parts of the organisation,’ the analysts wrote in a client note.

Analysts at JPMorgan also cut the price target on Amazon shares as they went to $145 from $175. But while they took note of weaker-than-expected results and guidance, the analysts said the report was ‘not thesis-changing.’

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Issue Date: 28 Oct 2022