AMZN recently dropped a bomb with talks to offer low-cost wireless services to its Prime members, causing a decline in the shares of major U.S. carriers, including Verizon Communications Inc. (VZ), AT&T Inc. (T), and T-Mobile US Inc. (TMUS).
While an AMZN spokesperson stated that they had no plans to add wireless services currently, analysts suggest that AMZN's entry into the telecom space could lead to significant disruptions, potentially offering cheaper plans in a country known for high wireless charges.
In this article, I will explore why investors should wait for a more favorable entry point in the e-commerce behemoth Amazon.com Inc. (AMZN).
Shares of AMZN have gained 49.2% year-to-date and 18.6% over the past month, closing the last trading session at $126.61.
Let us explore the factors that could shape AMZN’s performance in the near term:
Recent Developments
On May 17, 2023, AMZN launched new devices in its Echo lineup, offering customers easier access to Alexa both at home and on the go. The new devices include the Echo Pop, the Echo Show 5 Kids, and the all-new Echo Buds. These devices aim to offer customers a diverse range of options at an affordable price point.
On April 24, AMZN’s subsidiary Amazon Web Services (AWS) announced that it had introduced three new capabilities for its threat detection service, Amazon GuardDuty.
These enhancements aim to improve customer security by providing extended coverage and continuous improvements in machine learning, anomaly detection, and integrated threat intelligence.
Moreover, on April 20, AMZN announced the Anti-Counterfeiting Exchange (ACX), an industry collaboration designed to make it safer to shop online and more difficult for counterfeiters to move among different stores to attempt to sell their counterfeit goods.
Mixed Financials
AMZN’s net sales increased 9.4% year-over-year to $127.35 billion for the fiscal first quarter that ended March 31, 2022. Its operating income rose 30.1% from the prior-year quarter to $4.77 billion, while its operating expenses increased 8.7% year-over-year to $122.58 billion.
Moreover, its net cash used in investing activities came in at $15.81 billion, compared to net cash provided by investing activities of $906 million in the prior-year quarter. The company’s net income amounted to $3.17 billion or $0.31 per share.
Mixed Profitability
AMZN’s trailing-12-month gross profit margin of 44.73% is 27.3% higher than the industry average of 35.15%. Its trailing-12-month CAPEX/Sales of 11.98% is 274.9% higher than the industry average of 3.20%.
Also, its trailing-12-month ROCE, ROTC, and ROTA of 2.98%, 2.71%, and 0.92% are lower than their industry averages of 10.18%, 6.10%, and 3.64%.
Optimistic Analysts Estimates
Analysts expect AMZN’s revenue for the fiscal third quarter ending September 2023 to rise 8.5% year-over-year to $137.86 billion. The company’s EPS for the same quarter is expected to grow 37.9% year-over-year to $0.39.
Moreover, its revenue is expected to rise 9.1% year-over-year to $560.74 billion in the current fiscal year 2023.
Furthermore, the stock has surpassed the consensus revenue estimates in three of the trailing four quarters, which is impressive.
Premium Valuation
In terms of forward non-GAAP P/E, the stock is currently trading at 80.39x, which is 490.11% higher than the industry average of 13.62x. Its forward P/S multiple of 2.29 is 179.3% higher than the industry average of 0.82. Also, AMZN’s forward P/B of 7.03x is 183.8% higher than the industry average of 2.48x.
Moreover, its forward EV/Sales multiple of 2.48 is 118.4% higher than the industry average of 1.13.
POWR Ratings Reflect Mixed Prospects
AMZN has an overall C rating, which equates to a Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. AMZN has a C grade for Stability, in sync with its 60-month beta of 1.26. It also has a B grade in Sentiment, consistent with favorable analysts’ expectations.
The stock’s stretched valuation multiples justify its grade for Value.
In the 58-stock Internet industry, AMZN is ranked #17.
Beyond what I’ve stated above, you can view AMZN ratings for Growth, Momentum, and Quality here.
Bottom Line
AMZN had generated significant buzz with discussions about providing low-cost wireless services to its Prime members. However, the company also denied immediate plans for wireless services.
Additionally, the company introduced new devices in its Echo lineup and enhanced its threat detection service, Amazon GuardDuty. However, Amazon's financials and profitability have shown mixed results.
Therefore, I think investors might consider waiting for a more favorable entry point for the stock.
Stocks to Consider Instead of Amazon.com Inc. (AMZN)
Unfortunately, the odds of AMZN outperforming in the weeks and months ahead are significantly compromised. However, many good stocks in the Internet industry have impressive POWR Ratings. So, consider these three A-rated (Strong Buy) and B-rated (Buy) stocks instead:
trivago N.V. (TRVG)
Travelzoo (TZOO)
Yelp Inc. (YELP)
What To Do Next?
Get your hands on this special report with three low priced companies with tremendous upside potential even in today’s volatile markets:
3 Stocks to DOUBLE This Year >
AMZN shares fell $0.01 (-0.01%) in premarket trading Wednesday. Year-to-date, AMZN has gained 50.73%, versus a 12.35% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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