Amazon(NASDAQ: AMZN) is the world’s largest e-commerce company, a business that, just a few years ago, was considered “unruly.” In November 2021, the stock peaked before he fell more than 46%.This is mainly high Inflation, rising interest rates, and skyrocketing logistics costs. However, Amazon’s market position remains solid, and its massive infrastructure investment in fulfillment centers should pay “dividends” in the years to come.In addition, the company’s cloud business is still growing rapidly, with numbers of 1 market share. Amazon’s technical charts are showing signs of bullish momentum, and its stock is heavily undervalued. In this post, I intend to analyze the technology in more detail before reviewing the financials and my valuation model.
Powerful technical charts
In general, I We invest in companies based solely on fundamental metrics such as earnings and profits. However, technical charts are a great tool that can be used to show future buying points and where investors have found value in the past. In this case, we used an indicator called “Fibonacci” retracements (colored boxes/lines) to help identify support lines. I have identified a very strong support line. We labeled this as a “buy point 1”. Up to $80 per share. This coincides with the last major “crash” in March 2020, when the stock fell to his $80 per share. Furthermore, to the consolidated area where Amazon’s stock price remained flat in 2018 and 2019. The great thing about this example is that it immediately proves that technical analysis can add value. For example, many people knew his 2020 low on Amazon, but didn’t set up automatic purchase triggers for this zone.
I would really like Amazon’s stock price to return to the $98/share to $80/share support. Because this will be a strong buying opportunity. This is not financial advice, but I’d personally write that buying point down. Given general market volatility, or if there’s even more bad news about Amazon, we might pull back. , if the fourth quarter results (February 2nd) are very bad, the stock may break through the buy point 1, the support line. I don’t think this scenario is likely, but if it does, the stock could drop to Buy Point 2, the $65 per share support line. After that, if the decline continues, it could drop to $43 per share, or “buy point 3”.
For additional data points, there are some other technical charts that are very interesting. For example, Amazon broke through the nearly 20-year trend line shown by the white line below. This line runs from his 1998 to 2023. Many see the fact that this line has broken out of the trend line as a “bearish” sign. But I believe the trendline shows a ‘zone’ and I think it’s only slightly above the trendline. .
The chart below outlines the 50-day moving average (light green line) and the 200-day moving average (blue line). Amazon is currently above its 50-day moving average, so if the stock falls below his $98 per share, this could act as support. Moreover, the stock is still well below its 200-day moving average. So if the stock continues its bullish rebound, it could reach this line at around $118 per share. If you look at the last two stock price peaks, you can see that they hit the blue line (the 200-day moving average). This trend is likely to occur again.
Financial Summary and Advanced Valuation
In my previous article on Amazon, I covered its finances in great detail, so I’ll summarize it very briefly here. Amazon has reported shaky third quarter 2022 financial results. Its revenue was $127.1 million, up 15% year-over-year, but he missed analyst estimates by $370 million. This was largely due to foreign exchange rate headwinds and a bearish e-commerce environment.its cloud business [AWS] Reported revenue reached $20.5 billion, showing rapid growth of 28% year over year.
Amazon’s profitability was the main issue in the third quarter. The company reported a 48% decline in net income to $2.5 billion. This was due to the high inflation environment, which led to higher freight, oil and labor costs. Its fulfillment costs increased 11% year-over-year to $20.6 billion.
The positive for Amazon (and many companies) is that the latest inflation rate points to the consumer price index. [CPI] still falling The latest report, just released in 2023, puts inflation at just 6.5% in December 2022, his lowest since October 2021. This is down from peaks of 7.1% in the previous month and 9.1% in June 2022. Fueled by the continued decline in energy prices, which fell from a peak of $120/barrel in May 2022 to $80/barrel in December 2022. Reduced logistics costs for its fulfillment.
To evaluate Amazon, I applied the latest financial situation to my discounted cash flow valuation model. I’m projecting revenue growth of 10% next year. This is quite conservative as it is lower than the previous 15% growth rate. I expect this low growth due to the difficult economic conditions and expected recession. From Years 2 to 5, we project an annual growth rate of 11% as economic conditions improve.
To improve the accuracy of the model, we capitalized R&D expenses and increased operating margins. In addition, the company expects a pre-tax operating margin of 13% over the next 10 years. We expect this to be driven by continued declines in inflation and growth in the cloud segment, according to current trends.
Taking these factors into account gives us a fair value of $208 per share, and that share currently trades at $89 per share, making the stock either over 50% undervalued or “very undervalued.” It’s been rated.”
Amazon also trades at a price-to-sales ratio = 2, which is 40% cheaper than the five-year average.
Recession/low consumer demand
Many analysts are predicting a recession in 2023, which is expected to be triggered by a rising interest rate environment and a high inflation environment. Inflation has turned positive, but is still well above the Fed’s 2% target. In addition, the rising interest rate environment will increase debt service costs for variable mortgages. This means consumers have less cash in their pockets. This has direct implications for companies such as Amazon that benefit from regular consumers.
Amazon is the king of e-commerce, with a strong corporate culture and a vast fulfillment footprint. The company has many competitive advantages, from its size to its best-in-class technology. The company expects its cloud business to continue to grow rapidly, driven by digital transformation. The technical chart looks delicious and the stock is undervalued. So Amazon looks like a good long-term investment.