After losing nearly 1 trillion market value, Amazon is about to start a rebound

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A 56% drop in 2008 set the stage for a 270% rally in the ensuing 12 months, and while past performance is no guarantee of future performance, a sharp rebound is likely given Amazon's dominance in cloud computing and e-commerce Sex cannot be ignored.

In July, Barron's wrote a bullish article on Amazon, arguing that the company's cloud business AWS has huge long-term value. But the company's shares have fallen 25% since July as investors fretted about the near-term growth prospects of Amazon's core e-commerce business and AWS.

While these concerns are understandable, Amazon remains a long-term stock.

AWS revenue growth has slowed faster than expected, with analysts now expecting 25% revenue growth for the business in the fourth quarter of this year, down from 40% a year earlier.

But as Piper Sandler analyst Thomas Champion wrote in a recent research report, AWS has a market share of more than 50% in the cloud computing market and is expected to exceed $100 billion in revenue by 2023. close. That's more than three times as fast as Salesforce (CRM), which is growing at half the rate of AWS. If Salesforce is used as a reference, Amazon's cloud business would be worth more than half of Amazon's current market value of about $940 billion, and the value of that business will continue to grow.

In addition, Amazon's core business, e-commerce, continues to grab market share, but consumers are spending less amid macro factors such as rising inflation, high interest rates and a potential recession.

Revenue from Amazon's online store business fell 3% in the first quarter, 4% in the second, and returned to 7% growth in the third. Wall Street analysts are expecting revenue for the business to be flat year-over-year for the holiday season, which appears to be a worrying forecast as most forecasts point to at least a small increase in overall revenue for the online store industry during the holiday shopping season.

But the online store is only part of the story of Amazon's e-commerce growth. The company has a vast warehouse and delivery infrastructure that powers its third-party seller services business, as well as a growing advertising division that helps Amazon sellers draw attention to their wares. By 2023, third-party revenue will reach $125 billion, and advertising revenue will exceed $44 billion, more than a third of the size of the Meta Platforms (META) advertising business.

During the pandemic, Amazon has doubled its workforce to more than 1.5 million since the end of 2019 as it aggressively built out its platform. The company recently changed its strategy, laying off staff and closing some warehouses.

MoffettNathanson analyst Michael Norton recently started covering companies in the e-commerce space. He noted that since 2001, online shopping has grown from 1 percent to 14 percent of the U.S. retail market. Norton sees this trend continuing, saying: "It's more convenient and often cheaper for consumers to shop online."

Norton recommended only one stock in his research report, Amazon, which he believes is undervalued in its e-commerce business.

Norton believes that Amazon is gradually turning things around and refocusing on its cost structure. He estimates that Amazon is about to reap the rewards of the $81 billion the company has spent on logistics and transportation infrastructure from 2020 to 2022.

Norton pointed to an improvement in its logistics business as Amazon reined in costs. He expects the company's spending on logistics and transportation to fall to $10 billion in 2025, from $25 billion this year.

Norton believes that Wall Street is overestimating Amazon's capital expenditures and underestimating free cash flow. Lower operating leverage and additional spending controls are expected to push 2023 pretax profit 18% above Wall Street's forecast and 9% above the 2024 consensus estimate, he said.

Norton expects Amazon to earn $1.93 a share next year, well above Wall Street's $1.68. He expects pretax margins to hit 4.8% next year and 6.7% in 2024, up from Wall Street's forecast of 2.5%.

"Better-than-expected profits and lower capital intensity have been good for valuations," Norton said. "Three years of Amazon's valuation squeeze, lower pre-tax profit expectations, and higher-than-expected capital intensity, I think that's about to change," Norton said. ."

Amazon's stock has fallen about 50% since its November 2021 peak, losing nearly $1 trillion in market value in the process. But as Piper Sandler analyst Champion pointed out, a 56% drop in 2008 set the stage for a 270% rise in the ensuing 12 months, and while past performance is no guarantee of future performance, given Amazon's role in cloud computing And the dominance of the e-commerce sector, the possibility of a sharp rebound in stock prices cannot be ignored.

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