Amazon Stock Deep Dive Analysis: AMZN price target at $106 with near term risks offset by long-term growth

In this deep-dive analysis of Amazon (AMZN) stock, we utilize both DCF (discounted cash flow) and comparative P/E valuation models to arrive at our average twelve-month price target. We run through different scenarios based largely on margin assumptions with some historical analysis of where average industry-wide and index valuation ratios settle during periods of bear markets and recessions now that both the S&P 500 and Nasdaq have officially entered bear market territory. We then combine this with a technical analysis of Amazon to further strengthen our price target case.

Amazon: Company overview and history

Amazon was founded by Jeff Bezos in 1994. Amazon was listed via IPO in May 1997 and trades on the Nasdaq under the ticker AMZN. The company turned its first profit in the second half of 2001. The company has since gone on to be one of the most valuable companies in history with a market cap of over $1 trillion currently. It joined the elusive trillion-dollar club with fellow tech titans Apple (AAPL), Microsoft (MSFT) and Google (GOOGL).

Amazon is engaged in the sale of consumer products and services to the retail market via a series of domestic and international websites and online stores. The company operates through three distinct segments.

North America is the original retail business that expanded from an online bookseller to a consumer conglomerate offering a huge lineup of diverse products. The international division is a copy of the North American business model but with local websites in large consumer regions such as the UK, France, Japan, etc.

Finally, Amazon also operates the growing AWS (Amazon Web Services) division, which offers cloud services to retail and corporate customers. Amazon also competes with Netflix (NFLX) through its Amazon Prime streaming service, which is part of its subscription business. This segment operates and is accounted for in both North American and International segments.

Also read: Apple Stock Deep Dive: AAPL price target at $100 on falling 2023 revenues

As we can see below, North America still represents the most important geographical driver of Amazon’s profit, contributing 60% for the full year 2021. This, however, has been stable with AWS representing the main growth business.

Source: Refinitiv and FXStreet calculations

Ecommerce is the main driver of sales at Amazon with nearly 50% of revenues coming from this segment.

Source: Refinitiv and FXStreet calculations

The pandemic proved to be a boon for Amazon with a global, locked-in, and captive customer base. This resulted in huge gains in both revenues and profits and a resultant share price appreciation of nearly 100% from the pandemic lows in March 2020 until the end of December 2021. Despite this, Amazon actually underperformed both the S&P 500 and the Nasdaq indices as shown below.

Amazon (red) versus S&P 500 (blue) and Nasdaq (green) from March 2020 to December 2021 (Percentage gain)

Things have since taken a decidedly worse turn in 2022. Consumers, released into the open, have flocked to physical stores and largely reduced their online activity. Coupled with this has been the deteriorating macroeconomic and geopolitical environment, supply chain issues, and central bank tightening. This meant a number of headwinds for 2022. This culminated in Amazon (AMZN) losing 40% of its value year to date in 2022, again underperforming both the Nasdaq and S&P 500.

Amazon (red) versus S&P 500 (blue) and Nasdaq (green) Year to date 2022 percentage change

Amazon: Wall Street consensus forecasts

Source: Refinitiv and FXStreet calculations

Wall Street remains upbeat on prospects for Amazon. While the average price target has fallen by $25 since March, the average of $175 remains a colossal 75% above the current closing price. This is too optimistic in our view.

Amazon: Key valuation rating metrics

Source: Refinitiv, TradingView and FXStreet calculations

Amazon: Peer value comparison

Despite recent share price falls, Amazon still trades on a relatively high valuation compared to sector peers. The P/E at 50 is notably high and is a risk to the future valuation of the stock. While the forward P/E is trading slightly lower at 45, this is not historically high in our estimation but is based on EPS forecasts for the next 12 months that may already be too high.

Source: Refinitiv, TradingView and FXStreet calculations

Amazon: Macroeconomic backdrop, market cycle and sector analysis

There can be no argument now that the macroeconomic backdrop has changed utterly in the past six months. In addition, the landscape seems to be constantly evolving and is perhaps one of the greater periods of macroeconomic uncertainty in the past 20 years. We have witnessed the Federal Reserve shift from quantitative easing to tightening and raising rates aggressively. This has led to both bond and equity markets falling sharply. In fact, 2022 is on course to be the worst bond market return in history. Equities are now in bear market territory for all major indices. We write in advance of June’s Fed policy decision where the consensus has already shifted to a shock-and-awe rate hike of 75 basis points. The reason of course is runaway inflation.

Regular readers of our deep dives will know we have outlined that the average bear market lasts one year and sees a decline of approximately 40% for the main equity index – the S&P 500. Without a recession though, that average decline moves closer to 30%. Recently, we have done some further analysis to reinforce the probability that we may be closer to the bottom. Excluding 2000’s DotCom bear market and the 2008 financial crisis sees the average bear market running at about a 30% decline, irrespective of whether or not the US economy goes into recession.

We do expect a 2023 US recession, but we do not expect it to match the 2008 recession nor the one that attended the DotCom crash. 30% seems about right, but financial markets can and do overextend in both directions. With the Nasdaq being considerably higher beta than the S&P 500, which all this research is based on, we will see more losses for the Nasdaq and its constituents.

Also read: Nvidia Stock Deep Dive Analysis: NVDA price target at $205 with strong revenue growth

As we can see in the chart below, earnings per share (EPS) estimates are still way too high. Wall Street is penciling in EPS growth of 5% for the next quarter and a more modest decline of 2% ex-energy. This still looks too high. The recent decline in the S&P 500 has taken it back toward its long-term price/earnings (P/E) average. However, if earnings begin to come down, that will necessitate more declines for the index.

Readers can see on the chart below that the EPS estimates have flatlined but not declined. This could be the next headwind for equities.

S&P 500 index (yellow) versus average EPS estimates (purple), source: Refinitiv.

Retail sector

The US consumer has already begun to adapt their behavior in response to rising inflation. Consumer sentiment is extremely low. In fact, the widely watched University of Michigan consumer sentiment survey shows a multi-decade low. Recent reports from discount retailers Costco (COST) and Walmart (WMT) highlighted consumer behavior shifting to lower margin, lower-cost items and away from big-ticket discretionary spending. This trend will accelerate and continue in the coming quarters. There is always a lag between reported inflation and the real behavioral changes enacted by consumers.

Amazon: Recent news and earnings

Amazon reported its most recent earnings for the first quarter of 2022 on April 28. EPS missed considerably at $-0.38 versus the consensus of $0.42. Revenues were more or less in line at $116.44 billion. Costs increased by nearly $6 billion in Q1, which was the main factor in the unexpected loss. Amazon forecasts this to reduce to $4 billion for Q2. However, we remain decidedly uncomfortable with this assumption given the continued surge in input, energy and shipping costs, as well as supply chain issues. We expect margins to reduce or flatline at best.

The first quarter saw online sales fall 1% versus a year earlier as consumers opted for physical retailers versus the internet. This trend looks to have continued and even accelerated during Q2. Amazon Web Services was the sectoral star, but this still remains a small but growing part of overall revenues and profitability. Amazon included a loss of $7.6 billion from its investment in EV startup Rivian (RIVN). Rivian stock closed out the quarter at $50.24 and is currently trading nearly 50% lower at $27.30. Assuming standard mark-to-market risk, this is yet another headwind going forward. The $7.6 billion loss from the investment in Rivian for the first quarter was the result of a near 50% decline in Rivian’s share price. This looks then to be a similar outcome for Q2.

Amazon gave revenue guidance for the second quarter at $116 billion to $121 billion, while it forecast a loss/profit range of $-1 billion to $3 billion. Amazon forecasts 200 basis points of margin erosion from the strong dollar.

Also read: Tesla Stock Deep Dive: Price target at $400 on China headwinds, margin compression, lower deliveries

Amazon: Forecast and valuation

Using a traditional DCF model with forecasted inputs for free cash flow, net debt, capex and revenue give us a DCF price target of $106 for Amazon. This is more or less in line with the current price of $102.31, so the efficient market theory appears to be working here!

Source: Refinitiv and FXStreet calculations

However, we are less than confident in the consensus, and in the table below we have outlined the EPS based on margins remaining constant and a worst-case scenario. Even if margins remain the same and revenue forecasts prove accurate, that implies a 12-month EPS of $1.64. Amazon is currently trading on 50 times earnings, so $1.64 X 50 gives us a target of $82. Gross margins and EBITDA margins have been flatlining or declining as the two charts below illustrate. Forecasting then gross margins to remain flat looks conservative given what is happening to energy and the dollar.

Source: Refinitiv

We do feel there is more near-term risk of declines with the next quarter’s earnings. As outlined above, the Rivian stake should provide further losses, and the strong US dollar and supply chain issues will continue to put pressure on margins. However, we do feel the continued growth of AWS will serve to partially offset these concerns but only over a longer time horizon. Based on this, we would likely be more inclined to revise upward the consensus revenue projections from 2023 onwards.

Source: Refinitiv and FXStreet calculations

Just to reiterate, Amazon is currently trading at 50 times earnings, so EPS of $1.64 X 50 gives us a target of $82. Our risks are to a rerating of Amazon’s high P/E multiple. A rerating to 40 would mean a price target of $66. Amazon’s average P/E ratio for the past five years is over 100, so the current level is actually close to the bottom of the range.

Based on all the above, we find an average target of $90 is acceptable – the average of our DCF model and EPS estimates using constant margins.

Amazon: Technical analysis

For ease of comparison, we have placed a horizontal line at $90 in the AMZN stock chart below. Volume is significant at the price level, indicating price acceptance and stability. Therefore it is a point of fair value and strong support. It also represents a near-total retracement back to the March 2020 pandemic lows at $81.

Amazon: Executive summary, recommendation and price target

The technical picture above leans us more toward viewing $90 as a support rather than a price target. We do think near-term risks are likely for Amazon. We have already highlighted concerns over the continued mark-to-market losses from Rivian, margins remaining flat, and the overall bearish environment. This means we believe Amazon stock will target $90 but sooner rather than the more normal 12-month price target time horizon.

Q2 earnings results, which will be released on July 28, could be the catalyst for a washout toward $90 or even slightly below. That is likely to be the bottom of the cycle in our view. Margins will remain flat, but at that stage, we should be near the worst-case scenario for Rivian, and AWS should begin to accelerate its overall bottom-line contribution.

On a macro level, 2024 should see inflation and interest rates at lower levels, while Amazon will continue to benefit from cost synergies that no physical retailer can match. This makes Amazon attractive from an inflationary perspective. Margins should pick up strongly in 2024 as should revenue growth due to structural changes in the continued adoption of online versus physical retailers. This is especially evident in the younger demographic. Given that markets are forward-looking, we believe Amazon is nearer to the bottom of the cycle and that the next earnings quarter could be the washout required. From 2023 onward, we could see EPS upgrades that fuel the longer-term bullish case.

Based on the above, we opt for our initial DCF valuation of a 12-month price target of $106 and offer a HOLD rating.

Upside risks to our valuation

US avoids 2023 recession.
Inflation comes down more quickly than currently priced.
Inflation coming down more quickly leads to rate hike expectations lowering.
AWS growth accelerates.
Margin growth continues.

Downside risks to our valuation

Equities move toward bottom of P/E valuation ranges for the S&P 500.
Rivian continues to fall sharply.
Higher costs leade margins to continue to suffer.

Amazon reported earnings and forecast tables below. These are the foundation for all our DCF models.

			HISTORICAL (ACTUALS)	FORECAST (MEAN)
	FY Dec-19	FY Dec-20	FY Dec-21	FY Dec-22	FY Dec-23	FY Dec-24
RETAIL / RESTAURANT SALES	160408.000	215915.000	17075.000	341304.065	390954.140	296325.500
ADVERTISEMENT REVENUE	12593.000	–	31160.000	38533.048	48223.663	59650.905

REVENUE	280522.000	386064.000	469822.000	525050.584	613319.773	709456.293
Guidance	T	–	T	T	–	–
BUSINESS SEGMENTS
ADVERTISING	–	–	–	38514.487	47851.786	59720.724
AWS	35026.000	45370.000	62202.000	82204.941	104743.641	130630.058
ONLINE STORES	141247.000	197349.000	22207.500	234542.339	263933.086	301605.218
OTHER	–	–	2176.000	6224.312	7769.253	18910.594
PHYSICAL STORES	17192.000	16224.000	17075.000	18406.815	19152.062	19974.914
SUBSCRIPTION SERVICES	19210.000	25207.000	31768.000	36703.845	42537.736	49046.803
THIRD PARTY SELLER SERVICES	53761.000	80437.000	103366.000	115185.134	136321.090	165663.714
GEOGRAPHICAL SEGMENTS
AMAZON WEB SERIES	35026.000	45370.000	62202.000	82214.816	104499.786	127107.607
INTERNATIONAL CLASS	74723.000	104412.000	127787.000	134253.612	151777.065	180665.292
NORTH AMERICA	170773.000	236282.000	279833.000	309515.066	355732.176	410661.979

COST OF GOODS SOLD	165387.000	233307.000	272344.000	302856.408	344016.641	392094.070
GROSS INCOME	115135.000	152757.000	197478.000	222602.558	268568.442	324170.544
GROSS PROFIT MARGIN	41.040%	39.570%	42.030%	42.434%	43.936%	45.378%
Guidance	T	–	–	–	–	–

SELLING & MARKETING EXPENSE	18878.000	22008.000	32551.000	35636.791	40678.822	45263.492
SG&A EXPENSE	24081.000	28676.000	116485.000	214473.000	191734.000	268456.000
GENERAL & ADMIN EXPENSE	5203.000	6668.000	8823.000	10156.247	11486.045	12677.817
R&D EXPENSE	35931.000	37679.000	56052.000	60130.184	69629.135	78184.953
STOCK BASED COMPENSATION	6864.000	9208.000	12757.000	18217.684	20320.835	25154.190
OPERATING EXPENSE	265981.000	363165.000	444943.000	338806.438	370266.048	391267.141
Guidance	–	–	–	T	–	–

EBITDA	43395.000	57283.000	71994.000	74702.579	99306.289	126452.419
BUSINESS SEGMENTS
AWS	–	–	–	42742.000	57274.000	–
ONLINE STORES	–	–	–	1244.000	2785.000	–
PHYSICAL STORES	–	–	–	371.000	1435.000	–
SUBSCRIPTION SERVICES	–	–	–	3709.000	7294.000	–
THIRD PARTY SELLER SERVICES	–	–	–	11097.000	14259.000	–
GEOGRAPHICAL SEGMENTS
AMAZON WEB SERIES	–	–	–	43744.000	58095.000	–
INTERNATIONAL CLASS	–	–	–	8311.000	10547.000	–
NORTH AMERICA	–	–	–	12515.000	21730.000	–

EBITDA PER SHARE	4.305	5.616	6.990	3.660	5.647	10.446
DEPRECIATION	15150.000	16200.000	22900.000	33789.377	40308.425	48423.845
EBITA	15106.000	24742.000	–	25967.500	42976.500	66037.500
AMORTIZATION	565.000	509.000	502.000	2838.750	2326.000	3655.333
DEPRECIATION & AMORTIZATION	15715.000	25251.000	34296.000	40027.601	46030.426	51679.002

EBIT	14541.000	22899.000	24879.000	18267.056	34896.799	56376.255
BUSINESS SEGMENTS
AWS	–	–	–	25403.247	33240.057	40790.599
GEOGRAPHICAL SEGMENTS
AMAZON WEB SERIES	9201.000	13531.000	18532.000	26196.387	34368.536	40527.066
INTERNATIONAL CLASS	-1693.000	717.000	-924.000	-4783.263	-2181.378	2473.801
NORTH AMERICA	7033.000	8651.000	7271.000	1028.888	6672.840	20591.000

INTEREST EXPENSE	2295.000	1647.000	1809.000	1882.513	1951.398	1906.826

PRE-TAX PROFIT	13976.000	24178.000	26351.000	10067.520	34879.450	57215.225
TAX PROVISION	2374.000	2863.000	4315.000	1248.119	5793.345	9673.098
TAX RATE	16.986%	11.840%	16.380%	17.232%	17.727%	16.713%

NET INCOME	11588.000	21331.000	22036.000	7867.632	27399.630	44924.361
NUMBER OF SHARES OUTSTANDING	10080.000	10200.000	10300.000	10081.896	10353.589	10443.876

EARNINGS PER SHARE	1.151	2.092	2.140	0.796	2.692	4.290
EBITDA REPORTED	30256.000	48150.000	59175.000	64809.475	86562.276	117522.440
PRE-TAX PROFIT REPORTED	13976.000	24178.000	38151.000	10515.219	34836.157	57775.318
NET INCOME REPORTED	11588.000	21331.000	33364.000	8481.206	27835.950	46628.834
EARNINGS PER SHARE REPORTED	1.151	2.092	3.241	0.756	2.687	4.414
DIVIDEND PER SHARE	0.000	0.000	0.000	0.000	0.000	0.000