Amazon Stock: Why investors need to be patient for double-digit growth

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Despite volatility and fears of recession, Amazonit is (AMZN -2.52%) thesis is still largely intact and shareholders could potentially see double-digit growth for the foreseeable future. In this clip from “3 Minute Stocks Updates” on Motley Fool Live, recorded on May 25Motley Fool contributors Brian Feroldi and Brian Withers discuss Amazon’s earnings report and the challenges facing the e-commerce giant.

Brian Feroldi: Amazon reported earnings and the headline numbers were lackluster, shall we say. Revenue growth of 7%. Amazon in the quarter at $116.4 billion. That beat Wall Street’s estimate and was at the high end of management’s forecast. Look at earnings per share though, $757.06 in negative red, that was a huge reversal from last year’s $16, well below Wall Street estimates. What’s going on here? Well, let’s look by category. North American sales were up 8%, but look at operating income. Huge reversal down to minus $1.5 billion. International sales down 6% year-on-year. They were stable after adjusting for foreign currencies. Same principle here, the operating result went to a huge loss. Save us Amazon Web Services. It made. Amazon Web Services up 37% and operating income of $6.5 billion. Really, Amazon Web Services was basically the only bright spot here. Now, what the hell is going on with that massive net loss I just talked about? Well, you have to dig into this line here on the income statement called other income/expenses. In the prior year period, this figure was a positive of $1.7 billion. This quarter, negative $8.5 billion, that’s a $10 billion swing. But what is going on here? A few years ago, Amazon made a significant investment in Rivian (RIVN -5.48%). Rivian has since gone public. There is a new accounting rule that companies must increase their profits when their shares increase in their investments and decrease their profits when the shares of these companies decrease. If anyone’s been paying attention to Rivian’s stock, it’s basically been since it went public, so Amazon needs to take note. Now, beyond that, the most troubling news of the quarter was simply the lack of operational profitability. What is happening here? Management says it estimates $6 billion in additional costs hit it this quarter. Two billion because of wage inflation, two billion because of overstaffing and two billion because of overcapacity. The good news is that four of those six billion are completely under the control of Amazon’s management team. They are going to focus on normalizing their cost structure based on the current demand they are seeing. Now, speaking of current demand, management only guided 3-7% growth in the second quarter of this year. What’s up with that? Well, one of the reasons is that the economy is slowing down. The second most important reason is that last year Prime Day happened in the second quarter. This year, Prime Day takes place in the third quarter. That’s a 400 basis point change in revenue. This is going to be a very tough quarter for Amazon. However, the management made it very clear. Their current focus is to focus on the cost structure, scale the business to meet real demand, and scale the business after two years of massive investment.

Brian Wither: Yeah Brian. I’m going to double-click on this question of overcapacity and overstaffing. Since physical retail stores are now pretty much open everywhere, I didn’t expect Amazon’s growth to slow as much as it has and I even saw a tweet and took a tweet from random person with a grain of salt, but that seems to ring true, the indication was, “Hey, I have a friend who works in Amazon’s fulfillment center and the volume has gone from 75,000 packages per shift at 50,000 or less. Is that something shareholders should be concerned about?”

Feroldi: What has happened in the world for the past two years, Amazon’s revenue has skyrocketed due to COVID, what has management done? They have invested like crazy in their capacity. They spend more on CapEx in the last two years than in the previous 20 years combined. They’ve probably overshot hires. They probably outgrew the warehouses. Now that demand is normalizing, now the world is open again to say nothing of the fact that we could be heading towards that R-word as a country and face inflation. This company, like so many other companies right now, has huge challenges ahead. The good news is that the long-term thesis of this company is still largely intact. What’s happened with stock prices recently is the huge reaction from our 50% growth is the new normal to single digit growth is the new normal. My personal opinion is that this company can return to double-digit growth, probably within the next two or three years, but it will be a bumpy ride.

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