Should You Buy Amazon Stock? Fundamental Performance Analysis

Amazon, the e-commerce giant, had a challenging year in 2022 as its operating income dipped below zero. However, the bright spot in their portfolio was Amazon Web Services (AWS), the cloud computing platform, which delivered a robust operating income of $6.5 billion. This impressive performance occurred during a period when the US inflation rate hit its peak at 8.2%. Fast forward to June 2023, and we've witnessed a significant drop in the annual inflation rate to a mere 3%. This decrease in inflation has been a boon for Amazon, as its operating income has rebounded, reaching $3.2 billion in Q2 2023. AWS, though slightly down by 21.5% compared to Q2 2022, still boasts a substantial operating income of $5.3 billion.

Are You Buying AMZN Stock?

• Yes
• No

Amazon Balance Sheet

Turning our attention to Amazon's Balance Sheet, we notice a decrease in their current cash position, while current liabilities and long-term debt have both surged. The decision to adopt more debt during these economic conditions could potentially lead to higher interest expenses, which may impact margins down the road. According to data from macrotrends.com, Amazon's long-term debt for the quarter ending June 30, 2023, stood at $63.092 billion, marking an 8.68% increase year-over-year. It's worth noting that during the same period, the Fed Fund Rate climbed to 5.08% [source].

Examining the Income Statement, we see a significant uptick in gross profit, soaring from $47 billion to $65 billion. Consequently, this translates into an increase in Net Income from $3 billion to $6.7 billion.

Amazon Positive Free Cash Flow

Shifting our focus to the Cash Flow Statement, it's worth highlighting that Free Cash Flow (FCF) remained negative for most of 2022. However, Q2 2023 witnessed a positive FCF of $5 billion. When we compare FCF to the market capitalization, we observe that Q2 2023 FCF is nearly on par with Q4 2021 FCF, standing at $5 billion compared to $3 billion, respectively. Notably, the market capitalization has decreased by a staggering $300 billion since 2021, despite an overall increase in free cash flow from August 2021 to the present.

Amazon's Return on Assets (ROA) currently stands at 4%. While a desirable ROA is typically over 5%, it's encouraging to note that ROA has been on an upward trajectory, with the lowest point being 1.49%. Return on Equity (ROE), on the other hand, sits at 16.7%, a promising figure that has been steadily increasing since December 2022. In Q4 2021, ROE reached an impressive 44%, attributed to seasonal consumer trends, lower interest rates, the surge in online consumerism due to COVID-19, and growing income from AWS. Interestingly, Amazon's market capitalization remains lower than it was during the period of the 44% ROE. As these returns continue to improve, we may witness corresponding growth in market capitalization.

In terms of valuation, Amazon's forward Price-to-Sales ratio stands at 2.2 times, a considerable drop from the highs of 5x observed in 2020. Similarly, the Total Enterprise Value to Revenue ratio is currently at 2.4 times, down from the 5x recorded in 2020. These reductions may be attributed to macroeconomic pressures, including the diminishing appeal of stocks compared to bonds as interest rates rise. Additionally, concerns about rising oil prices, potentially surpassing $100 per barrel, are impacting Amazon's shipping and freight costs, thereby affecting margins. While the enthusiasm for AI remains strong among investors, there could be potential turbulence in its adoption as the market corrects itself.

US Inflation Back on the Rise

TradingEconomics.com

The key question moving forward is whether the annual US inflation rate remains under control. A well-contained inflation rate could bode well for Amazon's e-commerce operations. However, with the annual inflation rate rising back up to 3.7% in August, the stock's performance hinges on the upcoming CPI data for September, set to be released on October 12. Amazon stock bulls will be hoping for a decreasing CPI reading. Another bout of high inflation could squeeze Amazon's e-commerce operating income, as discussed at the beginning of this analysis. It's worth noting that among the factors contributing to the recent inflation increase, gasoline, oil, and airline fare have seen significant spikes, with their costs largely intertwined due to the influence of oil prices. This could have implications for Amazon's shipping costs.

Should You Buy Amazon Stock? Waiting for CPI figures will help this decision. With increasing oil prices, the headline CPI may continue to tick higher. Not only pressuring Amazon's bottom line with higher shipping costs, but also decreasing consumer demand.

Consider the Intrendias Terminal for simple Buy and Sell signals on AMZN stock. Also check out the Intrendias YouTube channel for further coverage on stocks!