AMZN Stock Forecast 2023 – How High Will Amazon Go?
Table of Contents: AMZN Stock Forecast
AMZN Stock Forecast Summary
Amazon’s revenue and margins are principally affected by the global economic cycle. The global economy is slowing down, with the US possibly entering a mild recession next year, while a European recession is certain. Furthermore, the Federal Reserve and ECB have been and will continue to increase interest rates to drive inflation from their current elevated rates to 2 percent. Peak interest rates are projected at mid-2023 (US about 5.25% fed funds rate), although the actual peak could be months sooner or later. The low in US equity markets tends to coincide with the last interest rate hike (plus / minus four weeks) or the anticipation of the last interest rate hike. With that, AMZN’s equity valuation trough should occur during 2023 unless AMZN’s operating ability manages to significantly improve its margin structure earlier, which we view as challenging because AMZN Stock Forecast has been a very efficient operator.
To that end, AMZN stock forecast stated on its recent earnings call: “The continuing impacts of broad-scale inflation, heightened fuel prices, and rising energy costs have impacted our sales growth as consumers assess their purchasing power and organizations of all sizes evaluate their technology and advertising spend. As the third quarter progressed, we saw moderating sales growth across many of our businesses and the increased foreign currency headwinds I mentioned earlier. We expect these impacts to persist throughout the fourth quarter. As we’ve done at similar times in our history, we’re also taking actions 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. We aim to strike the right balance between investing for our customers for the long term while driving operational efficiency improvements and accomplishing more with less.”
Cost reductions during a mild global economic downturn during 2023 set the stage for growth recovery with margin expansion for each of AMZN’s business segments. Margin trajectory to its previous peak will be facilitated by the increased advertising segment revenue and margin contribution, AWS continued growth at present or higher margin levels, and international e-commerce business moving towards break-even level within a few quarters. The additional upside would be realized via traction with large growth opportunities in the “other” business segment. An optimistic price target of $120 to $150 per share could be reached. There would need to be a consensus that the global economic recovery is in progress. Ideally, there would also be the anticipation of lower federal funds rates via interest rate cuts
from present levels. We view the probability of a bullish case scenario in the 25% range, 10 percent higher than the bearish outcome. Incremental operating results will indicate if this bullish scenario will manifest itself, the earliest between Q2 and Q3 2023.
Our baseline case implies the fed funds rate will peak at 5 percent during late spring 2023, and inflation will start to decline at a gradual pace. The US economy merely slows down yet does not enter a recession. EU region enters a recession, yet AMZN manages to significantly reduce international operating losses via drastic cost-cutting. North American business segment recovers, advertising traction, and subscription services enhance operating margin structure. AWS growth resumes, and margins stabilize. New AWS product offerings incite the customer base to adopt more AWS cloud-based web services in their attempt to reduce their cost structure. As market participants realize that AMZN’s growth and margin structure has stabilized and will start to increase, AMZN’s valuation multiples expand. In this scenario, we view a probable price target range of $100 to $125 during 2023. Note that a precursor to this scenario might be general market uncertainty during Q1 2021. We view per-share prices between $70 and $85 as opportunities to build a long-term position unless the bearish scenario appears increasingly probable.
Cost reductions are insufficient to offset negative margins due to a prolonged EU recession and a mild U.S. recession during 2023. Federal fund rates are hiked beyond 5.25 percent to curtail inflation. Global contagion causes valuation compression for all risky assets, equities in particular. Amazon Web Services (AWS) growth slows to below 20% y/y, and higher energy costs and lower-than-expected utilization negatively impact margins. Further risks constitute AMZN stock forecast mis-execution and substantially better traction by competitors. (If AWS were to be affected by mis-execution and market share losses, which we view as improbable due to its premier operating history, AMZN’s valuation would be severely affected.) In this scenario per share price of $55 to $70 could be reached. We attached a relatively low probability of about 15 percent to this outcome.
Prior to the Q4’22 earnings report, released in late January 2023, the U.S. and European holiday selling season will influence consensus estimates into the print. The present consensus is there will be weaker spending in the US and substantially weaker spending in the EU. In that sense, there’s a potential upside to current consensus estimates because consumers tend to spend as long as they still have access to savings and credit. Second. Because of Fed’s reactive function, macroeconomic indicators will be of utmost importance, particularly concerning inflation. Should there be higher rates for longer, the result would be lower AMZN stock forecast valuation and vice versa. Third, any incremental update about AWS growth rate and margins. AMZN recently hinted that “business was performing well.”
The three most important factors to focus on are revenue growth by segment, margin development by segment/region, and market share shifts. Revenue (Online Stores, physical stores, retail third party stores, Retails subscription services, advertising services, other, AWS, North American sales, International Sales, Operating Income and Margin, EPS, AWS growth rate, margins and backlog, Guidance vs. consensus, share repurchases, FX impact.
In this report, we present AMZN’s business, historical sales and margin developments, a discussion of AMZN’s SEC filing business segments, with particular emphasis on Amazon Web Services (AWS), a discussion of AMZN’s operating history and development by North American, International, and AWS segments. Furthermore, we present Price-to-sales valuation based on historical valuation, DCF, and comps. We conclude with a chart discussion. The appendix lists SEC cash flow, income, and balance sheet statements.
Amazon.com is an American multinational technology company focusing on e-commerce, cloud computing, online advertising, digital streaming, and artificial intelligence. It is one of the Big Five American information technology companies, alongside Alphabet, Apple, Meta, and Microsoft.
Amazon was founded by Jeff Bezos from his garage in Bellevue, Washington, on July 5, 1994. Initially an online book marketplace, it has expanded into many product categories, a strategy that has earned it the moniker The Everything Store. It has multiple subsidiaries, including Amazon Web Services (cloud computing), Zoox (autonomous vehicles), Kuiper Systems (satellite Internet), and Amazon Lab126 (computer hardware R&D). Its other subsidiaries include Ring, Twitch, IMDb, and Whole Foods Market. Its acquisition of Whole Foods in August 2017 for US$13.4 billion substantially increased its footprint as a physical retailer.
Amazon has earned a reputation as a disruptor of well-established industries through technological innovation and “aggressive” reinvestment of profits into capital expenditures. As of 2021, it is the world’s largest online retailer and marketplace, smart speaker provider, cloud computing service through AWS, live-streaming service through Twitch, and Internet company as measured by revenue and market share. In 2021, it surpassed Walmart as the world’s largest retailer outside of China, largely driven by its paid subscription plan, Amazon Prime, which has over 200 million subscribers worldwide. Amazon is the second-largest private employer in the United States
Amazon also distributes a variety of downloadable and streaming content through its Amazon Prime Video, Amazon Music, Twitch, and Audible units. It publishes books through its publishing arm, Amazon Publishing, film and television content through Amazon Studios, and has been the owner of the film and television studio Metro-Goldwyn-Mayer since March 2022. It also produces consumer electronics, notably Kindle e-readers, Echo devices, Fire tablets, and Fire TVs.
Amazon pursues market share leadership via a combination of price and very good service, episodically at the expense of margin, in order to attain market share and growth objectives. Amazon’s long-term operating history in terms of sales and net income growth is astounding in that the company has maintained high growth rates in spite of large numbers because it pursues large global market opportunities. The charts below depict long-term sales, net income growth, and employee and total asset growth.
Historically Amazon’s Year over Year revenue growth has fluctuated between 20 and 40 percent. During 2022 year-over-year, revenue growth was slightly lower due to the reversal of increased online purchases during the COVID pandemic. The 2023 growth rate will still be subdued due to the global growth slowdown and a highly probable European recession. The year-over-year growth rate is projected to increase by Q3 / Q4 2023 and will trend to its next peak in 6 to 7 quarters.
The projected revenue growth slowdown will adversely affect margins; they will also likely bottom during Q3 / Q4 2023 and then resume an increase to prior peaks or, more likely, to a higher peak due to mix shift changes: Via higher revenue and operating margin contribution from AWS and advertising services. Due to AWS’s profitability contribution and growth, aggregate margins will increase as long as AMZN’s other business lines, notably e-commerce and international, develop as they have in the past, not worse. This is primarily a question of strong operating ability, exemplified via cost-cutting and pricing- but also subject to the global business cycle. AMZN stock forecast has historically executed well, albeit inclined to pursue growth and long-term market share at the expense of near-term margins.
During 2021 AMZN stock forecast invested heavily in property plants and equipment. We expect this to reverse going forward due to cost-cutting and reduced global growth projections. In the past, increases in property, plant, and equipment contributed to increased growth and operating performance during subsequent years. Those investments will bear fruit during the late 2023 / early 2024 global growth recovery.
AMZN re-invests cash flow from operations into property, plant, and equipment to drive further growth, and market share, thereby aiming to maintain or expand its dominant market share. The fourth quarter tends to be CFO-minus-PP&E positive, while the first is negative. Expect this trend to continue during the downcycle, with lower CFO and lower PP&E expenditure. Conversely, once the world economy has troughed, presumably in mid-2023, AMZN’s margins and CFO will increase. This is crucial from an investment timing perspective: As an investor, there’s the opportunity to buy at what we assess to be a rock-bottom valuation and/or to build a position during the bottoming phase of US equity markets, which is subject to inflation developments, Fed’s interest rate policy, and economic indicator development.
AMZN stock forecast provides pertinent segment information in its annual SEC 10K filings. First, we discuss the following business segments’ operating history and outlook: Online stores, third-party seller services, subscription services, advertising services, physical stores, and the instrumental value creator, Amazon Web Services (AWS). Second, we present segment information based on North America, International, and AWS segmentation. We present historical time series, comp-based, and DCF-based Price-to-Sales valuations and chart considerations. The appendix contains SEC 10K’s cash flow, income, and balance sheet statements.
AMZN Segments Description
Amazon is a global conglomerate whose primary operations include eCommerce, video, and music streaming, retail subscriptions, advertising, physical stores, and cloud web services (Amazon Web Services, aka AWS). We describe these business segments below, including historical and near-term projected revenue contribution, growth rates, percentage of total sales, and a general discussion about margins and outlook.
Online stores (43%)
Includes the company’s ﬂagship Amazon.com, which is an eCommerce website through which sales are made. The website sells both private-label products and products from other brands. Revenue is recognized when control of the goods is transferred to the customer, which generally occurs upon our delivery to a third-party carrier or, in the case of an Amazon delivery, to the customer. From a margin perspective, online stores contribute the lowest operating margin, between negative two and positive five percent. International online stores operating margin has been lower than domestic online stores operating margins, which constitutes an opportunity for international operations, albeit at the expense of international growth opportunities.
Regarding competition, AMZN stock forecast online stores compete with virtually any other online retailer or offline retailer. AMZN’s competitive advantage derives from low price, fast delivery, leading customer satisfaction, scale economics as the dominant market share competitor, logistics, and an information advantage based on its sales, supplier, and customer data analysis. That being said, competition against the likes of Walmart and dominant share specialty stores will keep margins at low, cyclical levels. Online sales have become an increasing focus of large retailers, including Walmart, BestBuy, Dicks Sporting Goods, and others. Due to AMZN’s scale and operating ability, we expect AMZN’s market share to prevail and its margin structure to fluctuate cyclically as it has in the past.
After the COVID-induced revenue growth boom, AMZN stock forecast 2025 is currently experiencing a global economic growth slowdown reducing revenue growth and margin.
Physical stores (4%)
Whole Foods Market, a higher margin, premium quality grocery food chain founded in Austin, TX, was acquired by Amazon in 2017 and contributed to most of the physical store sales. Other physical stores include Amazon Pop Up and Amazon GO stores. Current growth initiatives include bookstores. AMZN stock forecast does not break out the operating margin structure of physical stores. We assume they are similar to the domestic online stores business. AMZN seeks to exploit synergies between the online and physical store business lines by grabbing more wallets and mindshare from consumers who habitually use AMZN for e-commerce, subscription services, and physical stores. Currently, AMZN physical stores should be viewed as ancillary to Online business. That being said, if AMZN identifies a synergistic acquisition, it may pursue a larger store presence. No such plans have been announced. Considering AMZN’s grocery business, knowing how the acquisition of a large grocery chain would not be extraordinarily surprising. Any large acquisition entails integration risk and would reduce short-term valuation and enhance long-term potential. The key question to be answered would be if Amazon stock forecast 2030 could integrate successfully and drive margin expansion.
Retail Third-party seller services (22%)
AMZN stock forecast offers programs that enable sellers to sell their products in AMZN’s online and physical stores. AMZN fulfills third-party sellers’ orders. AMZN earns commissions and related fulfillment and shipping fees from these arrangements. AMZN recognizes its revenues when the services are rendered, which generally occurs upon delivery of the related products to a third-party carrier or, in the case of an Amazon delivery, to the customer. This business line competes against the likes of Shopify, Etsy, eBay, and others. AMZN has been able to gain a dominant margin share. We believe AMZN will maintain its dominant market share and continue global growth with online sales growth. A key risk in this business line is regulatory concerns, as EU regulators claim AMZN uses third-party sales data to enhance the competitiveness of its own eCommerce offerings. The outcome of such disputes is entirely uncertain and likely already reflected in this business line’s valuation.
From an operating margin perspective, retail third-party seller services are more profitable than AMZN’s own eCommerce sales. However, operating margins are thin, in the low single-digit range, and subject to economic cyclicality.
AMZN’s stated during its Q3 ’22 earning call that third-party sellers and the products they offer remain an important strength of AMZN’s offering for consumers, representing 58% of total paid units sold in Q3, the highest percentage ever. It’s up from 56% in Q3 of last year. AMZN stock forecast is working with these partners, most of whom are small- and medium-sized businesses, to build an even stronger offering. AMZN recently hosted Amazon Accelerate, a U.S. conference for selling partners. AMZN stock forecast introduced new tools, including new email marketing capabilities, free-to-use shipping software that offers discounted shipping rates, and new features and analytics to help sellers better understand and act on conversion-driving content.
Advertising services (8%)
AMZN stock forecast provides advertising services to sellers, vendors, publishers, authors, and others, through programs such as sponsored ads, display, and video advertising. Revenue is recognized as ads are delivered based on the number of clicks or impressions. A major benefit of this growing segment is its higher margin structure relative to e-commerce. That being said, AMZN competes against well-established larger market share companies such as META (Facebook and Instagram), TikTok, Google, Twitter, and others. We view AMZN advertising services as a logical line extension to e-commerce and subscription services. It represents another opportunity to monetize information technology-derived knowledge about its customer base: As a higher margin, high-growth business line advertising services constitute a major value generator. It is only since 2019 that AMZN stock forecast broke out advertising services as a separate business line in its 10Ks; prior, this business line was reported under “other.”
AMZN operating margin for Advertising services is in the high single-digit range, with the potential to move even higher. This segment is also subject to the business cycle; growth is expected to increase after the trough of the current global macroeconomic slowdown.
AMZN commented during its Q3’22 earnings call that they saw good growth in their advertising offerings, where sales grew 30% year over year, excluding the impact of foreign exchange as vendors and sellers have embraced AMZN’s portfolio of products, which allow advertisers to build general awareness and/or drive sales of a specific product.
Subscription services (7%)
AMZN’s subscription sales include fees associated with Amazon Prime memberships and access to content, including digital video, audiobooks, digital music, e-books, and other non-AWS subscription services. Prime memberships provide our customers access an evolving suite of benefits that represent a single stand-ready obligation. Subscriptions are paid for at the time of or in advance of delivering the services. Revenue from such arrangements is recognized over the subscription period. Amazon Prime is the most popular subscription service and bundles Prime Music, Prime Video, and Prime Reading into one offering. Those services are bundled with lower shipping costs, including “free shipping” for items purchased on AMZN’s website. This creates a strong incentive for AMZN’s retail customer base to consume AMZN’s media offerings.
AMZN’s subscription services compete against a media provider gambit: Netflix, Disney, Spotify, and many others. Although revenue growth for the media industry has established itself as larger than GDP, the threat to profitability derives from capital outlays for media content creation and the competitive pricing dynamics between dominant competitors. NFLX’s recent bearish stock dynamics reflect these competitive dynamics. Although AMZN’s competitors are larger, AMZN stock forecast may well compete in this space with a lower margin structure, just as long as it is profitable and not margin-dilutive relative to the e-commerce business.
We view AMZN’s subscription services as a means to lock in online customers to preferentially purchase merchandise via AMZN’s e-commerce websites. As long as there are no substantially lower-priced, better service alternatives, this may lock in a customer for years. We expect the subscription services offered to adapt to customers’ evolving preferences. In summary, AMZN stock forecast subscription services enhance e-commerce customer retention and increase customers’ online purchases.
On its Q3 ’22 earnings call, AMZN stock forecast stated: “This was a big quarter for Prime members. We celebrated our eighth Prime Day in July, contributing approximately 400 basis points to our Q3 year-over-year sales growth rate. Prime members purchased more than 300 million items worldwide, making it the biggest Prime Day net sales event in Amazon’s history. As a reminder, Prime Day occurred in the second quarter of 2021. We also debuted the two largest Prime Video releases ever. The Lord of the Rings: The Rings of Power attracted more than 25 million global viewers on its first day. And in the first two months since its launch, Rings of Power has driven more Prime sign-ups globally than any other Amazon Original. NFL Thursday Night Football also premiered in September, averaging more than 15 million viewers during its first broadcast and driving the three biggest hours of U.S. Prime sign-ups in the history of Amazon.
From a margin perspective, we view subscription services in the low single digits, lower than other media subscription content competitors, because AMZN stock forecast uses subscription services as a means to increase eCommerce sales via more customers, higher spending per customer per year, and higher customer retention. The subscription services margin and growth profile are also subject to the business cycle.
Other revenue includes sales related to various other service offerings, which are recognized as or when those services are performed. This includes, but is not limited to, payment services. This category aims to grow nascent business lines into standalone segments, advertising services, and AWS being highly successful case examples.
AMZN’s valuation derives from the value of future growth opportunities comprised of existing business lines and those that will establish themselves in the future. Whether developed and grown in-house or via acquisitions, AMZN’s past execution record comforts that AMZN stock forecast will identify emerging high-growth, profitable business line opportunities and develop these into large ongoing business lines necessitating 10K/Q segment reporting. For this reason, AMZN has and will continue to command a premium valuation. Stated differently, the net present value of other business lines derives from a high probability of successfully developing add-on high profitable growth business lines. While most acquisitions have been relatively small compared to AMZN’s market capitalization, there may be a need for larger, or multiple acquisitions, for instance, in the payment / financial services space, in order to compete as a share leader. Although AMZN’s management has been understandably reserved about disseminating its new business lines’ growth plans, we view this as logical. It is fair to assume that AMZN stock forecast will seek to leverage its e-commerce infrastructure, insights about its customer base, and AWS computing to drive the growth of any new business line opportunity. As with the AWS and advertising businesses, we can expect AMZN stock forecast to be a fast follower in any nascent mega market growth opportunity, focusing on in-house development and organic growth at the expense of free cash flow.
Amazon Web Services (AWS) (16%)
AWS arrangements include global sales of computing, storage, database, and other services. Revenue is allocated to services using stand-alone selling prices. It is primarily recognized when the customer uses these services based on the number of services rendered, such as compute or storage capacity delivered on demand.
AWS has exhibited very strong sales growth at high margins because the service constitutes a cost savings value proposition to its customers, plus a flexibility advantage to scale. Moreover, the IT complexities entailed in operating mass-scale IT cloud services limit the number of meaningful competitors, resulting in high margins and rational pricing.
Migration from on-premise IT solutions to public cloud (AWS) continues; its customer base has expanded from the IT industry to a broad array of industries. Budget allocation and reliance on public cloud solutions are an ongoing trend, meaning public cloud spend takes market share from company in-house, on-premise operated solutions. AWS’s customer base has been evolving to include industries (and government) less impacted by global growth slowdown cyclical factors. In other words, AWS revenue growth slowdown should be expected to be less than in prior down-cycles.
According to IT market research firm Gartner, the core public cloud addressable market will grow from $1500 billion during 2022 to $2150 billion in 2026, while the core public cloud penetration will increase from about 25% to 35% over the same time period. It is fair to assume MSFT, GOOG, and AMZN stock forecast will maintain their market share. Therefore, AMZN’s AWS business growth should continue at an annual rate of 22% to 28%. Should a lower annual growth rate manifest itself during the depths of the 2023 slowdown, there will likely be a strong snapback immediately afterward, akin to the SAAS (software as a service) software revenue snapback after the 2008/9 financial crisis.
From a forward-looking perspective, the following questions are critical: Will the core public could evolve as currently projected by Gartner with a public cloud CAGR of about 23% from 2021 to 2026? Will the “big three,” AMZN, MSFT, and GOOG, maintain their market share? Will AMZN stock forecast maintain its AWS operating model with CAPEX discipline? In terms of answering these questions, let historical performance be our guide to derive projections. A CAGR of about 20 percent appears plausible because large corporations and SMBs derive scale and scope benefits from employing cloud solutions while lowering their cost. Due to competitive pressure, the adoption rate of cloud solutions may be even higher, particularly in international markets, which will follow the US market’s lead to lower their cost curves. Next, AMZN, MSFT, and GOOG enjoy first-to-market, mindshare, scale, R&D, and sourcing, operating cost advantages. This all speaks to them maintaining their market share. Moreover, AMZN, MSFT, and GOOG are rational competitors because they will seek to avoid a price war in the cloud business segment. Of the three competitors, AMZN’s e-commerce history implies using price and lower margins to gain market share. Up to this point, AWS has been able to avoid any significant operating margin contraction to gain or maintain market share. The high-growth cloud business requires high operating margins in order to grow the cloud business infrastructure while generating free cash flow. A further argument for fairly stable AWS operating margins is AMZN stock forecast valuation sensitivity to AWS growth and margin rates, as much can be said for MSFT and GOOG. In terms of another large player challenging the big three, only Chinese companies come to mind – so far, these have not been very active in the US and EU markets, and we doubt they would pose a major market share risk if they would, due to data privacy concerns.
AWS’s key indicators are growth rate, operating margin, and backlog dynamics. AWS backlog dynamics are stellar and speak to its recurring revenue model. Q3’22’s backlog was $104bln, up 57% y/y, compared to $20.5bln recognized as revenue during the quarter with a 26 percentage y/ y growth rate. The backlog has been steadily increasing because customers agree to longer-term contracts. AWS tends to lock its customers in due to high switching costs and business continuity risks. One caveat about AWS is its exposure to the SMB market, which is more cyclical than enterprise customers. MSFT’s AZURE cloud solution exposure to enterprise customers is higher.
During the Q3 2022 quarter, AMZN stock forecast stated that AWS infrastructure is being expanded by citing the launch of the AWS Middle East region in August and the recent announcement to launch the AWS Asia Pacific region in Thailand. AMZN continues ramping up its AWS investments, adding product builders, sales, and professional services headcount to help customers save money, invent more quickly in their businesses, and transition to the cloud. AMZN stock forecast stated that its customers, due to macroeconomic risks, are seeking to control (reduce) costs and that AWS offers options such as moving storage to lower-priced tiers and shifting workloads to an AMZN in-house developed “Graviton” chip.
The table below depicts AWS operating performance.
During its most recent quarter, AWS surprised to the downside due to lower-than-expected operating income percentage and somewhat lower-than-expected year-over-year sales growth. A key resulting question is if something has fundamentally changed about AWS’s long-term prospects or not. In our view, most likely, there has not been a change in AWS’s long-term business prospects. The current global economic slowdown will run its course, with USA and China regions projected to resume growth sooner and stronger than the EU. Once global growth resumes, the transition to cloud computing solutions will resume at a higher rate, feasible with pent-up demand. Therefore, monitoring cloud industry dynamics and AMZN’s competitive interaction within the cloud, indicative of growth, margin, and CAPEX development is key to inferring AWS valuation changes and, with that, AMZN’s valuation. AWS business prospects are one of the largest, if not the largest, AMZN stock forecast valuation swing factors.
Based on Gartner’s core cloud total addressable market projections, AMZN’s AWS growth rate should substantially increase AMZN’s valuation, assuming AMZN maintains share among the “big three” (AMZN, MSFT, GOOG) and this troika manages to maintain its market share at 20% plus operating margin levels. While this may appear to be a tall order and an optimistic projection, why should they not succeed? Past successful operating performance implies equivalent future execution. The main risk would be a prolonged, deeper-than-expected recession. In that case, AMZN’s valuation recovery would resume from a lower level. To guard against that risk, attempt to scale into an AMZN stock forecast position with the US growth slowdown / mild recession stock market trough.
We base our AWS valuation on 2026 revenue projections and a P/S multiple of what intermediate and long-term growth projections will be at that point in time. The key to valuation expansion will be AMZN’s ability to grow with the could market and maintain its market share and operating model. AWS is worth about half of AMZN’s total market capitalization. See the valuation table.
North American, International, and AWS Revenue & Operating Margin Disclosures
Next to the segment reporting discussed above, AMZN stock forecast also discloses financial information about North American, International, and AWS business operations. In addition to revenue, those segments also disclose operating margins. We have included our estimates for Q4’22 and 2023.
AMZN’s current predicaments are a macroeconomic-induced growth slowdown with rising input costs for electricity, and transportation, among other cost inflation. As a result, margins have declined in all business segments.
During its most recent earnings call, Q3’22, AMZN stock forecast stated: “The continuing impacts of broad-scale inflation, heightened fuel prices, and rising energy costs have impacted our sales growth as consumers assess their purchasing power and organizations of all sizes evaluate their technology and advertising spend. As the third quarter progressed, we saw moderating sales growth across many of our businesses and the increased foreign currency headwinds I mentioned earlier. We expect these impacts to persist throughout the fourth quarter. As we’ve done at similar times in our history, we’re also taking actions 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. We aim to strike the right balance between investing for our customers for the long term while driving operational efficiency improvements and accomplishing more with less.”
We can therefore expect AMZN to aggressively cut costs, cut headcount (one reduction in force has already been announced), negotiate for better terms with suppliers, and pass on costs where feasible. We expect AMZN to exit the current global macroeconomic slowdown as a stronger, leaner competitor.
Macroeconomic consensus projects forecast a mild U.S. recession during 2023, while the EU will experience a recession. As such, growth rates should snap back during 2024. The international business segment poses the challenge of negative margin rates during the recession. AMZN stock forecast will have to decide if right-sizing the business to operate at break-even would offer better long-term valuation prospects. From an investor’s perspective, persistent negative margins imply mis-execution.
Regarding AWS, it, too, has been affected by a growth slowdown and margin contraction. In the same vein, a growth and margin snapback is highly probable.
Therefore, macroeconomic developments will instrumentally affect AMZN’s operating performance. To that end, we monitor S&P Gobal manufacturing and service PMIs, Retail Sales, Consumer Confidence, and Consumer Expectations, among other economic data, notably inflation related. Datapoints from other major retailers speak to AMZN’s incremental aggregate demand changes and pricing.
AMZN’s aggregate demand outlook and valuation will also hinge on incremental inflation data points: PCE, CPI, PPI, and Michigan one and five-year inflation estimates. The federal reserve uses this data to forecast future inflation estimates and to decide on their reactive function. Concretely: To what extent to hike or ease fed fund rates? Federal Reserve officials have stated that unless there’s a clear path to 2 percent inflation, monetary policy will continue to be restrictive via higher fed fund rates, which reduce lending activity and, therefore, growth. In other words, the federal reserve funds rate will chiefly influence economic indicators speaking to commercial and consumer activity. Ergo lower PCE, CPI, PPI, and Michigan inflation expectations data imply higher than-expected future business activity and vice versa.
To sum up, AMZN’s near-term growth and margin rates will be influenced by federal reserve policy, the development of inflation economic releases, business activity economic releases, competitor & industry data points, and its business operations initiatives such as cost cutting, pricing, and promotions. Assuming AMZN stock forecast will manage its downturn and any first-rate corporate entity, revenue and AMZN’s revenue and growth trajectory during 2023 are more of a question of macroeconomic developments and monetary policy than AMZN’s execution. From an investor’s perspective, this spells opportunity because AMZN’s growth and margin snap back is highly probable.
AMZN’s valuation enhancement opportunity derives from AWS maintaining its growth rate and cloud market share while maintaining or expanding its current margins profile. For the North American business segment, margins need to revert towards the prior peak and ideally form a higher peak (achievable due to a better mix, notably advertising services and AWS). As for the international segment, at the very least, it should be operated at operating margin breakeven. On a final note, further valuation upside exists via business lines that are incubated in the other category and, due to growth and profitability, necessitate separate segment reporting as advertising services and AWS have done in the past. We view this as the largest valuation upside opportunity, even though a lack of a tangible product or service in this regard – at this point in time – merely implies that should any such opportunity arise, AMZN’s multiple expansion would recognize it.
Below we present two valuation tables. The first is based on comps by segment business line. It implies that AMZN stock forecast is currently about 10 percent undervalued relative to the comps price to sales (P/S) valuation.
The second valuation approach derives from a DCF-based P/S approach based on 2026 revenue estimates by North American, International, and AWS segments. The P/S multiples are based on longer-term growth and margin expectations at that point in time. The resulting enterprise values are discounted back using a CAPM discount rate. We present bull, average, and bear cases. This valuation approach suggests that AMZN’s likely fairly valued at present. Substantial upside exists if AMZN manages to permanently nudge its margin structure higher and, as stated earlier, if AMZN stock forecast grows new profitable business segments. The best-case scenario arrives at a $143 per share valuation, while a worst-case scenario would result in a $55 per share valuation.
Historical Price to Sales Valuation
Based on the historical Price-to-Sales time series, AMZN’s valuation should revert to 2.5 to 3 during the next global growth recovery, as long as AMZN stock forecast maintains its market share and operating efficiency advantages relative to its competitors. This would translate into a per-share price of about $125 to $150. (Note that we also have to consider changes in interest levels. – This valuation approach would be compromised if interest rates remain at present elevated levels.)
Valuation based on Comparable Companies by Business Segment
Price-Sales-Valuation based on 2026 DCF discounted back to 2022
AMZN’s bull run started in 2015 at $15 per share and peaked in December 2021 at $187 per share. While this stellar performance has been attributed to AMZN’s eCommerce and AWS growth and margin trajectory, financial market liquidity also played an important role: Due to the COVID pandemic, the federal reserve pumped liquidity into the financial markets. Some industries benefited from the resulting valuation expansion more than others, AMZN stock forecast being one of them. From March 13, 2021, to September 1, 2021, AMZN’s share price appreciated from $82.5 to $ 176.8. Currently, we are in a market phase where Federal Reserve and ECB are employing restrictive policies to reduce inflation to 2 percent. This results in tighter financial conditions and lowers stock market valuation. Again, the AMZN stock forecast is disproportionally affected. This is despite AMZN’s outstanding long-term business prospects. (As a case example, CSCO has not to this day reached its peak share price from April 2000, despite industry-leading, profitable fundamental results. Ditto INTC.)
From a chart perspective, AMZN’s current stock price per share is $94.41. The 32 percent Fibonacci retracement is at $79.50, while the early 2019 AMZN stock forecast low, a double bottom with June 2018, is 68.32. The 23 percent Fibonacci retracement is at $55. We view each of these levels as a potential buying opportunity, subject to the economic and federal fund rates outlook and AMZN’s margin trajectory. Currently, we view any price between $70 and $85 per share as an opportunity to build a long-term position.
Conversely, resistance levels are at $101 (50 percent Fibonacci retracement), $121 (62 percent Fibonacci retracement, $136, and $150 (79 percent Fibonacci retracement).
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