Amazon Stock Is a Buy Despite Downturn

  • Amazon (AMZN) stock is down 37% in 2022.
  • Operating cash flow turned negative in the first quarter, alongside other retailers.
  • Next month’s Prime Day event will be a key test of support.
AMZN stock - Amazon Stock Is a Buy Despite Downturn

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Amazon (NASDAQ:AMZN), the original cloud czar, has fallen from its throne. The latest tech downturn will be heralded by reporters as the death of the cloud gods, a clouddammerung.

A market cap once poised to pass $2 trillion is now fighting to hold $1 trillion. A 20-1 stock split that was supposed to serve as a catalyst has instead proven an excuse to dump it.

Amazon was trading June 16 at about $105/share, a market cap under $1.1 trillion. Since the start of 2022 its value has fallen by 37%, almost doubling the fall of the Nasdaq average.

Ticker Company Price
AMZN Amazon $105.20

But the business keeps growing. Amazon is expected to report earnings of 14 cents/share on revenue of $120 billion on July 28. That’s up from sales of $113 billion for last year’s second quarter.

AMZN Stock and Retail Pain

Despite the enormous size and growth of Amazon Web Services, the company’s cloud operation, it is still mainly a retailer. That’s the real problem here.

AWS brought in $18.4 billion of revenue during the first quarter, up 36% from a year earlier. It reported 35% of that revenue, $6.5 billion, as operating income. But that still represented just over 10% of the $116 billion in sales it reported for the quarter.

Large retailers like Walmart (NYSE:WMT) and Target (NYSE:TGT) have been whipsawed. They felt forced to double orders last year due to tight supply chains. By the time those orders came in, customer interest had waned. This was even true at Amazon, which reported nearly $3 billion in losses from retail operations during the first quarter, and growth of only 8% in North America. International product sales declined 6%.

The cloud was built to feed off the retailer. But the retailer is now sponging off the cloud.

They Still Believe

Analysts are still pounding the table for Amazon stock. There are 38 of them at Tipranks and recently 36 said buy.

Watch it surge on the stock split, said Bloomberg. Goldman Sachs (NYSE:GS) still sees 55% upside potential , even while it jettisons other tech stocks.

JPMorgan Chase (NYSE:JPM) analysts still see Prime, its $12/month shipping and media bundle, as a great value. Doug Anmuth said it delivers customers $1,100 in annual value for its $139/year price.

But since the split, the stock’s fall has only accelerated. It’s down 12% since June 6. Technicians think it could fall below $100/share.

Time to Split?

There’s an easy way to raise the AMZN stock price. Split up the company.

The retail arm of Amazon is two-thirds the size of Walmart, which has a market cap of $327 billion. That makes its value about $222 billion. That means you’re currently getting Amazon’s cloud and media arms for under $900 billion, less than 9 times revenue. Those operations are profitable.

The problem lies in financing them. Amazon finances its capital spending, $15 billion last quarter, with cash flow, $39 billion of it in the last 12 months. Walmart, a pure retailer, had $17.6 billion of operating cash flow for its last four quarters.

The Bottom Line

The fall of AMZN stock is driven by fear for its cash flow. If we are heading into a recession due to high interest rates and rising fuel prices, that cash flow could be in peril. Thus, goes the argument, so could Amazon’s capital budget.

But we’re not in a recession yet. Consumers continue to spend. Amazon has used the slowdown to improve its supply chain and operations. I recently ordered a bicycle seat from them at dinner and had it on my porch the next morning.

Prime Day, Amazon’s annual clearance sale, will be on July 12-13. If that lays an egg, those who have been selling AMZN stock are right and analysts are wrong to keep believing.

But I don’t think we’re wrong.

On the date of publication, Dana Blankenhorn held a long position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.


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