Shares of the world’s biggest e-tailer slid 7% on Friday, as investors digested disappointing results that came against tough year-ago comparisons, but some on Wall Street said an opportunity to buy the shares was knocking.
Even with Friday’s sharp decline Amazon.com
stock is up 2.6% with more than half of the year gone and the holidays ahead. In 2020, the pandemic forced restrictions on movement for much of the world and kept many workers at home, driving a 76% gain in the stock.
The benchmark S&P 500 index
has gained 17.1% for the year to date.
The sticking point for investors was a miss on sales and a prediction that slowing sales growth would continue, as shoppers returned to old brick-and-mortar habits and generally did something besides shop. Chief Financial Officer Brian Olsavsky said on the earnings call that he expects “this pattern of difficult year-over-year revenue comps to continue for the next few quarters.”
Still, revenue rose 27%, reminded Neil Saunders, managing partner at GlobalData. He said exceptionally high expectations set the stage for disappointment despite the more reasonable assumption that e-commerce sales would come back down to Earth as the recovery progressed.
“As people started to return to normal life and pre-pandemic shopping habits, this prospect was never on the cards – something attested to by the fact total U.S. online retail sales grew by a modest 12.6% over Amazon’s second quarter,” Saunders wrote in a note.
“What this means is that, in growth terms, even with the benefit of Prime Day, Amazon was running up a down escalator to maintain its trajectory – especially as it came up against a prior year growth comparative of over 40%.”
SIG Susquehanna analysts cut their price target from rom $5,500 to $5,000, but kept a positive rating on shares as lead analyst Shyam Patil said it was a “great time to buy,” Amazon shares.
“Looking at the two-year compounded annual growth rates, trends are still very strong and we see no reason to be concerned. Ultimately, we continue to see Amazon as a long-term secular grower underpinned by its strong e-commerce, cloud, and advertising businesses,” said Patil in a note to clients.
At UBS, a team of analysts led by Michael Lasser kept a buy rating on the e-commerce giant, but dropped a 12-month price target to $4,020 from $4,350. He said Amazon is facing a “transition period” where overall online growth will stay sluggish, especially as U.S. office workers keep returning to work.
“Importantly, Amazon still accounted for 44% of all incremental online spend in 2Q. This is well ahead of the 36% that it has typically accounted for over the past 5 years,” he said.
“If Amazon can keep its dominant position it should keep seeing growth from the long-term secular trend of e-commerce.”
And Lasser was echoing that buy the dip sentiment for Amazon shares. “In the past, it’s been prudent to accumulate Amazon’s shares when they pull back in response to an investment cycle. We think it would be shrewd to do the same now,” he said.
Rather than just focusing on the revenue numbers, Credit Suisse takes a closer look at spending in its most recent note.
“[W]e submit that what is more important is the ongoing ramp in CapEx ($15.7b in 2Q21) as Amazon continues to purchase middle/last mile assets in preparation for the resumption of one-day Prime Delivery expansion and what should be the rollout of same day,” wrote analysts led by Stephen Ju.
Credit Suisse rates Amazon stock outperform with a $4,700 price target.
“We are hence buyers of Amazon shares on a potential pullback, in anticipation of what should be a period of faster consumer wallet share gains.”
While Amazon made gains during the pandemic, experts note that the competition, like Walmart Inc.
and Target Corp.
also ramped up their convenience and speed capabilities, applying pressure on the e-commerce giant.
“The reopening of society didn’t pull people away from online shopping, with the e-commerce behemoth posting its third consecutive $100 billion quarter. That said, the reopening of brick-and-mortar puts a little pressure on Amazon as Walmart, Target, and other retailers have gotten aggressive in their buy online, pickup in-store (BOPIS) offerings,” said Guru Hariharan, former Amazon manger and current CEO of CommerceIQ, an e-commerce automation company.
At KeyBanc Capital Markets, a team of analysts led by Edward Yruma, left a $4,000 price target and overweight rating in place, but said investors may need to brace a little as “reopening will drive lumpiness in growth rates.”
“Nevertheless, Prime Member spending is still up y/y and overall competitive dynamics remain more favorable than pre-COVID. +37% AWS growth was strong and corporates focusing on growth investments should be a tailwind,” said the analyst.
While admitting even their own below-consensus third-quarter estimates “proved aggressive,” Yruma said they expect “AWS and advertising will prove to be the largest areas of expansion for Amazon in coming quarters.”