Amazon (NASDAQ:AMZN) holds its Prime Day sale next month and it will tell us a lot about our economic future.
This should be the best Prime Day ever. Like other retailers, Amazon over-ordered when supply chains were stretched. Then consumers slowed product purchases with the new year. Warehouses are bulging with merchandise, and everything must go. Some Prime Day sales have already begun.
If merchandise flies away, that’s a good sign for AMZN stock and the American economy. If it doesn’t, we could be in for a very long recession.
AMZN Stock and Prime Day Setup
Prime Day sees AMZN stock at its lowest price in over a decade. After its 20:1 stock split it opened June 21 at $108/share. That’s a market cap of just $1.08 billion, 51 times last year’s earnings. It’s also 36% below where it started 2022, 40% off its high of last year, a split-adjusted $180. Amazon stock now sells for what it did on Feb. 10, 2020, just before the pandemic began.
But this is not the same Amazon. It’s 70% bigger. It also has higher costs, for warehouses, for labor, for moving goods around, and for the Amazon Web Services (AWS) cloud. Amazon has put $64 billion of capital to work in the last year, with 40% of it going to AWS. That business alone is at a $71 billion/year run rate. It’s still betting on growth.
The impact of this spending came into focus for me when I found I needed some new exercise equipment a few weeks ago. I placed the order before I went to bed, and it was on my front porch before I woke up.
Not all orders are moving so quickly, but Amazon is plainly ready to make some big sales next month. The recent slowdown has given it time to breathe, and it has put that time to work. Amazon’s logistics operation has doubled in size over the last two years.
Some analysts even say Amazon is in recession, its earnings falling this quarter as they did last. Amazon is expected to earn 14 cents/share for the June quarter, on revenue of $120 billion. Its failure to meet estimates for the last quarter started the stock’s latest dive. Bears see the trend continuing.
The stock’s fall isn’t due to the company shrinking, however. Assuming it hits estimates, sales will still be up 6% year over year. But with money costing money again, multiple compression is widespread.
Amazon is now worth just over two times its estimated 2022 revenue. If you value AWS at nine times revenue, as is true for cloud rival Microsoft (NASDAQ:MSFT), the rest of the company is worth just $370 billion. That’s close to its expected 2022 revenue.
The Bottom Line
Americans love a bargain. Amazon Prime Day will be loaded with bargains.
One such bargain is AMZN stock. Inflation has taken a huge bite out of its value, cutting what investors are willing to pay for its revenue and earnings.
But Amazon has very little debt. It’s 70% bigger than it was the last time its stock was this low. Capital spending on its cloud and delivery systems, all paid for from cash flow, have it primed to grow if customers show up.
Management will have an early read on Prime Day at its late July earnings call, but analysts will have already offered their own estimates by then. If things go smoothly both Amazon, and the market, could go on another bull run. If not, not.
On the date of publication, Dana Blankenhorn held long positions in MSFT and 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 email@example.com, tweet him at @danablankenhorn, or subscribe to his Substack.